Everybody in the crypto market is talking about LUNA and UST and the chaos that is in a way also causing a lot of FUD in the crypto market.
Lets understand what’s happening with LUNA and UST.
UST which is a dollar-pegged stablecoin has depegged twice in the last 3-4 days which caused the initial chaos and is now trying to stabilize around $0.90 to the dollar. UST is an algorithmic stablecoin which is not backed by any collateral.It maintains its value through a system of arbitrage along with a protocol mechanism where LUNA serves as a reserve asset in the whole process.
LUNA – UST THE CREATION MECHANISM
You always have an option to redeem LUNA for UST dollar for dollar and the same goes for UST to LUNA. When LUNA was around a $100 you could have redeemed it for 100 UST and similarly 100 UST for 1 LUNA
If the price of UST is lower than a dollar, you have an opportunity to burn LUNA, following which you mint UST and take the difference to the peg as a profit. Similarly if UST is greater than a dollar you now can burn it for LUNA to restore the peg. A lot of them have been buying UST for less than a dollar for which they get 1 dollar worth of LUNA, sell it in the open market and make a profit.
Because of all that’s happening, the demand for UST is growing immensely as LUNA is being burnt every passing minute.
ANCHOR PROTOCOL
Terra’s stablecoin is getting its utility from Anchor Protocol which is a money market holding almost 74% demand in April 2022 for UST which is appx $12.3bn out of the $16.7b as it pays a handsome 19.5% APY on it. In May 2022 the said 74% was reduced to 40% according to market sources. It was also noticed in April that the anchor reserve yield has been melting at a speed of $122m per month.
Jon Wu in his tweet gave an amazing example of the FUD in the market now:
Say the price of LUNA is $1 billion. Then someone could mint 1 billion UST by burning a single LUNA. Then let’s say the price o it falls to $1 for no good reason. That person could redeem their stablecoin for 1 billion LUNA. So suddenly, again, for no good reason at all-there’s a shit-ton more LUNA in circulation being dumped on the open market. This is an essence of what’s happening today.”
Jon Wu
WHERE IS UST/LUNA NOW?
As we were writing this post LUNA has lost more than 99% of its value and currently trades at 0.65. Will LUNA ever see its ATH again or will it go to dust is to be seen, however everyone in the crypto market has learned the importance of Doing Your Own Research before investing as this happening with a stablecoin was almost unimaginable and also open the doors to a lot of questions for the crypto industry to answer.
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