“Others, like DAI, use a collateral system backed by other cryptos like Ethereum,” explained the Lemon platform and expanded: “UST, for its part, is not backed by any other asset. It is an algorithmic crypto that achieves its stability through an incentive system”.
Thus, parity with the dollar is achieved through an expansion or contraction of the supply of Moonthe cryptocurrency native to Terra, which when moved allows UST to oscillate slightly with the value of a dollar.
“Is named peg to the mechanism by which stablecoins are tied to the price of the reference asset. In the case of UST, it is the dollar. When the UST peg drops, there is an incentive to burn UST against LUNA. The loss of peg was so strong that LUNA began to inflate yesterday, but even so it is not enough to recover the parity of UST with the dollar. Thus, LUNA lost more than 60% of its value in less than 24 hours,” Lemon added.
For his part, the financial analyst, Sergio Morales, in a column in Ámbito, also explained this operation: “In simple words, a new cryptocurrency is created that partially supports the stablecoin. This is how, for example, TerraUSD (UST) was born, a stable cryptocurrency from the Terra (LUNA) ecosystem whose main objective is to eliminate regulatory risk by completely avoiding the use of non-cryptographic reserves.”
Every time UST drops below its dollar parity, there is an opportunity to buy that stablecoin at a discount and then trade (and destroy) it for $1 worth of LUNA. What happened is that the currency lost parity, investors sought to change your UST per LUNA at one dollar and pocket the profits by selling LUNA on the open market.
This created enormous selling pressure for LUNA in the market. Selling pressure, the panic around the dollar peg by UST, and the halting of the UST and LUNA markets by Binance, were the key factors behind this LUNA downtrend.
In the last few hours it became known that Do Kwon, the South Korean developer behind TerraUSD, used LUNA to buy Bitcoins and other cryptocurrencies in order to partially support UST. “This was presented as a way to secure UST’s anchor while maintaining decentralization, but is mechanically a negative for LUNA,” they said from Investing.
And they closed: “These types of designs have been criticized by market observers as risky, as they rely on traders to return the value to $1, rather than having assets continually support the price.”.
Source: Ambito
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