Terra USD (UST) Fallout Followed by Slow Recovery
The Terra USD (UST) stablecoin is starting to regain some of its positions, moving from lows of $0.68 to $0.91 on Tuesday. UST still has trouble regaining its promised range of 2% around the price of $1.
A day later, UST had another dip to $0.78, with uncertainty of the potential for recovery.
Top stablecoins Tether (USDT) and USDC keep to $1, while most algorithmic stablecoins are still hovering around $0.99, which is not an unusual deviation.
LUNA crashed even deeper to $10.61, after an attempt at recovery above $30. LUNA temporarily stabilized while Bitcoin (BTC) recovered from the dip under $30,000 and traded above $31,500.
Is the Market Out of Trouble
The effect of Terra and UST is not entirely erased. For one, there are still questions about whether the BTC recovery will hold. Additionally, over the past few months, Terra had multiple partnerships with other blockchains, bridging UST to protocols like Cosmos, Avalanche, NEAR Protocol, Nexo and others.
One possible exception may be the fact that decentralized protocols work with other types of data and may keep the $1 peg for UST. If no traders try to sell it on exchanges, this asset may keep generating value within the decentralized ecosystem.
The Terra-LFG wallet, which until days ago held more than 42,000 BTC, has disappeared from the rich list. After a long accumulation period, Terra moved the coins in two transactions, to sell them and bring back the value of UST.
Additionally, now the Terra wallet has no more funds to defend the dollar peg. LUNA is insufficient as collateral, as its market cap has fallen under the value of all UST in circulation. Another run on UST would extend the problem and leave the asset cut off from centralized exchanges. There is also a risk UST could keep some of the “zombie” value locked in decentralized protocols.
Terra Protocol Sees TVL Slashed
Terra protocol had grown its total value locked (TVL) to above $28B, with Anchor protocol the chief source of turnover. After the events of May 9-10, the TVL sank to $11.9B, with no floor to further price drops.
Now, the protocol has to restore not only its value, but also the trust of investors. Terra LFG promised that such a vicious circle with loss of value was not possible and would be controlled quickly. Unfortunately, Terra had to sell BTC acquired even at above $47,000 for a lower price of $33,000. The subsequent loss of BTC value only worsened the slide in LUNA and actually affected UST negatively.
Terra LFG intended to acquire as much as $10B in BTC, but the crash happened and at best, the foundation is again at ground zero in rebuilding the reserves.
According to some traders, Terra LFG worsened the market effect, and should have left UST to self-regulate through LUNA burning. But exchanges like Binance also blocked UST deposits, withdrawals and trades, making it impossible to buy UST as a form of extreme arbitrage.
More signs emerged that the attack was preconceived and the BTC selling was not necessary.
Will Other Algorithmic Coins Cause Problems
One of the stablecoins that went through a similar scenario was Neutrino USD (USDN). As with UST, there were suspicions the price attack was deliberate. USDN still managed to return close to $1 and has fallen mostly to $0.99. There are also more clues that the de-pegging event may be caused deliberately.
Recently, TRON launched its own multi-asset stablecoin, USDD. As with UST, the intention is to distribute USDD aggressively to multiple blockchains. The TRON DAO will also have a multi-asset reserve to protect the USDD peg.
Multiple other protocols have attempted to copy Terra, producing minor stablecoins. The risk is for retail owners and projects that use those stablecoins in various lending and high-return protocols. A breakdown could mean the asset works as a stablecoin for the purpose of smart contracts, but cannot be cashed out easily.
Will BTC Recover
BTC saw multiple shocks, including sales from miners and some retail inflows to exchanges. BTC shifted to bearish attitudes for 2022, with the potential to revisit levels under $20,000 or even dip to $10,000.
Some of the price action hinged on liquidations for leveraged positions. But BTC is also losing some of its retail base due to the significant risk in the short to medium term.
BTC, however, managed to absorb the Terra LFG sales, though there is no reliable data to check how much of the reserves were sold. There are also news of El Salvador increasing its BTC stash at around $30,700, taking another 5,000 BTC off the market.
BTC trading volumes also increased to $68B in 24 hours, possibly inviting buyers to lock in coins in renewed accumulation. In 2022, BTC may also see selling pressure if some of the Mt. Gox coins get returned to the owners’ wallets.
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