Multibillion dollar bet bitcoinCan act as a reserve currency for the crypto-economy is being evaluated as UST (a controversial stablecoin) struggles to keep its $1 peg.

UST plunged to 99c over the weekend. It raised concerns of a “bank panic” and could have Terra, Terra’s project, forced to withdraw $3.5 billion worth of bitcoin in order to back the token.

Terra’s creator, Luna Foundation Guard, has announced that it will loan $750 million to bitcoin-trading firms in order to keep UST’s peg. However, investors remain concerned by the potential implications of bitcoin.

UST, which was created by Terraform Labs of Singapore, is an algorithmic stablecoin. This stablecoin aims to perform the same function as stablecoins such as tether which tracks the price. U.S. dollarIt is possible to do so, however it will not be backed by actual cash.

Instead, UST — or “terraUSD” — is created by destroying a sister token, known as luna, using smart contracts, lines of code written into the blockchain.

Carol Alexander from the University of Sussex explains that if you have $405, you can burn one luna to make 405 of the UST stabilizecoin.

The same applies vice versa — new luna is minted by burning UST and other algorithmic stablecoins that Terra supports.

Terra’s protocols feature also an arbitrage mechanismInvestors can take advantage of deviating token prices by investing in. Over-demand for UST could lead to its price exceeding $1. This means that traders could convert 1 lb of luna to UST and make a profit.

This model is intended to balance supply and demand of UST. Users are encouraged to create new UST and burn luna when the price for UST becomes too high. This increases the supply of stablecoins while decreasing their circulation.

Alexander states, “The luna is more rare, making it more valuable. This value can then be transferred into UST.”

When UST’s price is too low, the reverse happens — UST gets burned and luna is minted. This should help to stabilize the prices.

LFG bought another $1.5 billionLast week, the organization raised its bitcoin reserves by $3.5 million. The organization stated Monday that it was taking proactive steps to protect the stability of UST.

This includes bitcoin lending of $750 millions to traders to “protect” the UST peg. Another 750 million in UST is being lent to purchase more bitcoins “as normal market conditions.”

“In the case of most of these algo stablecoins, we have seen that the teams behind the project usually need to step in — so these are not fully decentralized or managed independently yet,” said Vijay Ayyar, head of corporate development and international at crypto exchange Luno.

The largest global digital coin dropped below $33,000 on MondayIt is now at its lowest level in over a year, since July 2021. In the 24 hour period ending on July 20,21, it was at around $32,921, a drop of 6%.

Derek Lim, Head of Crypto Intelligence at Bybit said that LFG’s intervention would “add to the selling pressure.” BTC may drop before rebounding when short sellers take advantage.

Kwon said LFG was “not trying exit its bitcoin position.”

He stated that “As the markets recover, it is our plan to have the loan redeemed by us in BTC,” increasing the amount of total reserves.

The idea is that eventually, UST holders will be able to exchange their tokens for bitcoin. The role that bitcoin plays in a crisis situation is the one played by luna, where arbitrageurs buy UST and swap it for Bitcoin at a discounted price. It’s still weeks off from implementation and isn’t clear how it will work in practice.

Hendo Verbeek from Faculty Group, who is responsible for quantitative trading operations, stated that the biggest threat moving forward would be another depegging UST, which could force LFG to sell its bitcoin holdings. Verbeek says that further liquidations could occur for “over-leveraged” buyers.

He said, “This is an awful scenario that looks real.”