Grayscale: third largest algo stablecoin loses peg to dollar

The third largest stablecoin, Terra USD (UST), lost its peg to the US dollar, sending the price of LUNA into a downward spiral. Attempts to recover the peg resulted in additional sell pressure on Bitcoin and Ethereum while the market was already in a downward trend going into the weekend.

UST, the native stablecoin of the Terra smart contract platform, had a market cap of $18 billion before losing 20% of its market value — over $4 billion — nearly overnight before recovering back to $16 billion on May 10th.

The UST peg failed for two main reasons:

  • On-chain selling – Curve pool imbalance:
    • $350 million UST was swapped for USDT using the Curve protocol. This left a disproportionate amount of UST versus other stablecoins in the pool for users to swap against, lowering the value of UST on-chain
    • Curve is a crucial piece of the DeFi ecosystem, allowing users and dApps to efficiently swap stablecoins. The massive selling of UST on Curve created an imbalance in reserves, leading to the value of UST falling below the peg on the protocol.
  • Off-chain selling
    The remaining portion of UST withdrawn from Anchor protocol was sold on centralized exchanges like Binance driving down the value on those markets as well

After months of collecting 20% APY in UST rewards from Anchor, users began to withdraw their tokens and cash out on May 7th. This exodus resulted in Anchor’s Total Value Locked (TVL) decreasing from $18 billion to $6 billion in just three days as users rushed to trade out of their UST positions. Approximately 70% of the UST supply was locked in Anchor, leaving the circulating supply of UST vulnerable to dilution if it suddenly floods the market — and that’s exactly what happened.

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