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DeFI: UST, Luna’s stable corner deindexes from the dollar

The UST, the stable corner of the Luna ecosystem has temporarily de-indexed from the dollar, plunging the community into uncertainty. Explanation.

The Luna ecosystem is still in the news. This time by means of a consequent depreciation of its stable coin the UST. This phenomenon is, in terms of stable coin, a depeg.

Classically, currency indexing or Peg translates into a monetary policy in which a government sets a fixed exchange rate between its own currency and a foreign currency or a basket of currencies.

In the field of crypto currencies, a smart contract substitutes itself for the government in the operation of the indexation. Thus, in the case of the UST, the latter is indexed to the dollar creating an equivalent peg of 1 UST = 1 USD. The scenario in which the value of the stablecoin is no longer equivalent to the currency to which it is pegged is called Depeg.

The UST is special in that it operates algorithmically. It is based on supply and demand in a decentralized manner. The problem of this operation is that it can potentially lead to the collapse of the ecosystem. In any case, this is the thesis of several players in the sector.

Indeed, in the Luna ecosystem, sales pressure on the UST necessarily leads to sales pressure on the LUNA. This situation arises because of the arbitrage that takes place if the UST falls below the price of $1. In fact, since the UST is a key part of the Terra ecosystem, its fragility on the market can demonstrate a decline in interest in the LUNA.

This vicious cycle is referred to by some as a death spiral. Nevertheless, it is important to note that this scenario is often criticized by a part of the community as being unlikely.

Furthermore, since the beginning of the year, the Luna Foundation Guard has been looking to perpetuate the UST by acquiring a significant share of Bitcoin to create a reserve for its stablecoin. At the time of this article, the foundation has 80,394 bitcoins purely intended to prevent a market collapse scenario.

UST drops

UST no longer equals $1 for a few hours

During the day on May 7, a massive sale of UST on the Curve finance and Binance platforms causes the price of the stablecoin to fall below the dollar threshold. The depeg scenario became a reality, but the reasons do not seem to be related to the vicious circle feared by some.

Indeed, the reason for this detachment of the UST price from that of the dollar seems to be linked to a coordinated attack against the stable coin. Specifically, it would be the sale of nearly $300 million of UST over a short period of time that would have caused the price of UST to fall. The arbitration provided for in the protocol did not have time to react.

The head of Matic’s information system even questioned on twitter the particularly shady nature of the scenario and the potential involvement of Terraform Labs in the depeg of UST.

Do Kwon, the creator of Luna, took it upon himself to deny these remarks directly in response to Mudit Gupta’s tweet.

UST re-anchors itself to the dollar

Quickly after the events, Do Kwon reassured the community by expressing confidence in UST’s resilience. For now, time seems to be proving him right as the UST price is already close to returning to its usual level.

Inevitably, this UST stall has led to FUD (Fear, Uncertainty and Doubt) around the Luna ecosystem. Without mitigating the risks of such an event, the ability of the protocol to provide an effective response to a coordinated attack against the stable corner must be commended.

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