UST Has proven to be an intriguing stablecoin, even if it fails badly at sustaining its peg these days. While the currency is on the cusp of surpassing $0.91 again, it can as easily top below $0.85. There are some key takeaways from the current situation that need to be taken into account for the future, assuming this stablecoin has any.
The UST Peg Is An Illusion
There is merit to an algorithmic and decentralized approach to keeping a stablecoin at a $1 peg. Moreover, one must commend the team for using Bitcoin as a reverse asset in this scenario, even though it is not necessarily the best choice. From an innovation viewpoint, USDT is a breath of fresh air in the saturated stablecoin industry, yet not all experiments go according to plan.
For UST, the peg to the US Dollar is merely an illusion. Users can often trade it for $1 of any other currency, but that doesn’t mean Luna’s stablecoin is worth that amount. Especially for those redeeming UST for $LUNA, things get rather interesting. Users can always exchange 1 $UST for $1 worth of LUNA, even if UST dips below the peg.
More Usability Is Needed
The primary utility for the UST stablecoin is the Anchor Protocol. It is a very successful DeFi project, and it has brought tremendous attention to the Terra ecosystem. Unfortunately, it often represents between 40% and 70% of the entire UST circulating supply. That creates systemic risk, even at the low end of the sale, and highlights the need for broader implementation of this stablecoin.
The downside to the recent de-pegging of UST is how very few developers will implement a currency that cannot maintain a promised value. Incorporating LUNA or ETH or BNB is different, as those are known volatile currencies. A stablecoin should never deviate from the peg by such a margin, yet UST is anything but stable today. Even if one earns 20% per year for holding $UST through Anchor, the risk remains.
UST – LUNA Balance Remains Key
For those unaware, there is an intriguing correlation between UST and LUNA. The more UST is in circulation, the fewer LUNA will exist. In an ideal world, LUNA will become so scarce due to overwhelming UST demand the asset skyrockets. That scenario once seemed plausible but has become much less likely due to recent events.
Additionally, the redemption price of LUNA for UST is leaning toward more UST being redeemed in this intricate relationship. Ideally, the LUNA price remains high, people burn more LUNA, and mint more UST. Burning LUNA would allow for solid price direction and stability for Terra’s primary asset. However, getting more LUNA in circulation as people redeem UST is problematic. Finding a new balance needs to happen soon, but that seems unlikely.
What About Bitcoin Holdings By LFG?
The Luna Foundation guard has become a key cog in this UST and LUNA machine. While they used to leverage Treasury $LUNA to sell and fund the Anchor Protocol Reserve to pay UST stakers, that is not as easy as it may seem. Instead, the LFG expanded into buying Bitcoin to provide another UST offramp and alleviate some of the pressure affecting the $LUNA circulation and subsequent dumping.
As the TerraUSD peg remains under significant pressure, it also affects both offramps. Holders keep converting to either Luna or Bitcoin and create massive market pressure. Some will claim it is a coordinated move among whales and shorters, although it is difficult to prove with 100% certainty. Opportunists are found everywhere, although those with genuine malicious intent are never far away either. That said, the pressure on UST will likely keep bitcoin in a very volatile state for some time to come.
The Outcome Remains Uncertan
Regardless of how one looks at things, the Luna Foundation Guard has its work cut out. Two scenarios can unfold: one where UST stabilizes – either through BTC normalizing or the LFG being able to buy back in lower – or the entire stablecoin implodes and LUNA goes off the deep end. That latter scenario seems highly unlikely, but it remains worth considering.
Ideally, UST restores, Bitcoin normalizes, and LUNA goes back up in value. Pulling off such an escape act would be a tale to tell future generations. Unfortunately, it seems more likely either LUNA or UST holders will face a severe blow. Right now, they both suffer, although LUNA holders are off far worse price-wise. The battle continues for LFG and the broader Terra ecosystem.
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