Investors Flee Terra Anchor as UST Stablecoin Repeatedly Loses $1 Peg

May 10, 2022

Hours after its launch, LUNA 2.0 sees a significant price drop.

Investors Flee Terra Anchor as UST Stablecoin Repeatedly Loses $1 Peg

Anchor, the Terra blockchain-based yield-generating protocol, has had $5 billion in deposits, or more than a third of the total, disappear over the last few days, in what amounts to a crypto-style bank run on one of the blockchain industry’s most popular initiatives. Deposits on Anchor, which promised up to 19.5 percent on deposits, fell to $8.7 billion on Monday from $14 billion on Friday, according to statistics on the protocol’s dashboard.

The majority of deposits to the blockchain-based system are in Terra’s dollar-pegged stablecoin, terraUSD (UST). In recent days, the stablecoin has frequently lost its dollar peg, indicating a trust crisis among certain traders and investors. “Some really strange things were going on in the Terra ecosystem last night, notably around $UST de-pegging,” said David Shuttleworth, DeFi economist at ConsenSys, in an email to CoinDesk. “This prompted considerable market panic and led users to abandon Anchor.”

Terra’s stablecoin and the financial system built on it are under attack after UST lost its dollar peg twice in three days. UST is the largest algorithmic stablecoin, which is a form of dollar-pegged cryptocurrency that maintains its price by producing and eliminating supply via a swap with another token, in this example, luna (LUNA). Investors rushed to the Anchor protocol in search of double-digit rates, causing the circulating quantity of UST to skyrocket from $2 billion to a peak of $18.5 billion in a year since investors required UST to deposit.

The protocol’s high yield was criticized by critics as unsustainable since interest revenue from borrows could not cover yield distributions, necessitating an outside source to replenish reserves. According to Mirror Tracker, the Anchor Yield Reserve is on course to be drained in as little as a month, falling to $176 million from $323 million in the previous 30 days.

To alleviate concerns, Terraform Labs and other investors established the Luna Foundation Guard (LFG) foreign reserve to guarantee UST in the event of market turbulence. LFG’s reserves were estimated to be approximately $3.5 billion after it purchased $1.5 billion in bitcoin (BTC) on Friday.

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