Terra’s algorithmic stablecoin TerraUST, known more simply as the UST, lost its peg for the second time since Sunday.

The stablecoin, which has a 18.1 billion supply, saw its value drop by 27% in the last 24 hours to $0.6879. Since then, the UST has regained a majority of its value and is currently hovering around $0.9161 as of this writing.

The freefall of the UST occurred amidst a sell-off in the broader crypto market as plunged below $30K, while whole cryptocurrency market’s value as a whole dropped by 2.6% to $1.46 trillion.

This marks the second instance of Terra’s algorithmic stablecoin losing stability in the past three days. UST fell briefly to $0.987 on Sunday May 8th when a single whale drained $285M of TerraUST. But it soon rebounded.

To keep its stablecoin’s 1:1 peg with the U.S. dollar, Luna Foundation Guard (LFG) yesterday announced the lending of $1.5 billion worth of Bitcoin. The foundation expects to make Bitcoin the reserve currency for Terra’s ecosystem, and also its main stablecoin UST.

1/ To address market worries around UST, the LFG Council has just voted for 1.5B capital (1.75B BTC, 0.75B UST). Some more context on why and how: https://t.co/TfaAPkzgUJ

— Do Kwon (@stablekwon) May 9, 2022

Contrary to centralized stablecoins like (USDT), TerraUSD is a decentralized algorithmic stablecoin, which maintains its peg to the U.S. dollar through the use of the ecosystem’s governance token, LUNA.

The smart contract-based mechanism that makes it possible to mint each TerraUST stablecoin through the burning of LUNA coin is what allows this.

Price of the UST is determined by the algorithm which tracks the demand and adjusts the supply to match it. Arbitrage Mechanism, a protocol feature which incentivizes users, allows them to make new stablecoins, and burn LUNA tokens, if the price of UST gets too high.

On the other hand, the algorithm also facilitates the opposite action—the burning of UST stablecoins to mint LUNA when the price of the stablecoin drops. The protocol feature helps to stabilize UST price.

LUNA’s Price Drops

Both TerraUST as LUNA have interconnected prices so the drop in one reflects on the other.

According to CoinMarketCap, Terra’s governance token LUNA fell in value by 60% over the past 24 hours, going from $61.24 on Monday 9th, to $24.14 early on Tuesday 10th. LUNA’s market capitalization shrank to reflect this, dropping by 48% and sitting at $10,8 billion at the time of writing.

Why you should care

TerraUST is home to over 18 million coins and ranks tenth in market capitalization. If the LFG succeeds with its plan to make Bitcoin a reserve currency for Terra, thereby allowing UST owners to redeem stablecoins into bitcoin, this could lead to a detrimental impact on all Bitcoin markets.

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