Fear is that the Luna Foundation, guardian of the Terra ecosystem, will have to sell bitcoins to maintain or burden, or that it will affect the cryptocurrency market as a whole
O LUNA, or native token of the Terra blockchain, registers on the afternoon of this Sunday (8) a remaining 10% and is priced at US$ 65.80, second or CoinMarketCap. The reason for the stay – different from the melting of other cryptocurrencies, such as bitcoin – is that the stablecoin UST, linked to LUNA, could lose its ballast.
Stablecoins are cryptocurrencies weighted in fiduciary currencies, such as the US dollar, at parity from um to um. A loss of ballast (or “depegging”, not term in English) refers to stablecoins that exceed or fall in relation to US$ 1, in which they should be paired.
UST caiu for US$0.985 not Saturday and, now, it is being traded at US$0.99. Although a 1% drop will not be uncommon for stablecoins when markets are under intense pressure, parity is quickly restored. No case of UST, it will be more than 16 hours.
Some critics claim that this case highlights UST as a risk to the broader cryptocurrency market as Luna Foundation Guard (or LFG), the organization responsible for UST, has $3.5 billion in bitcoin (BTC) ready to sell as a last resort if you need to defend the stability of the UST.
The LFG reserves are in BTC (93%), LUNA (3.5%) and AVAX (3.5%).
The press on UST has started to increase in recent days after large capital outflows have occurred in the Anchor Protocol do Terra, where deposits in UST have generated annual returns of 18.8% for investors. Despite this, we don’t know the reason why you took us out, it could be a big left of the market.
Not that it seems to be a domino effect, or the liquidity pool of the Curve protocol shows an imbalance of about 67% (where there was a 50/50 split).
Curve is the main protocol for the provision of liquidity of non-Ethereum stablecoins and is highly valued for its deep liquidity, allowing traders to convert stablecoins, such as UST and USDC, with very low “slippage” (price difference before and after trading).
Since the Curve is a central part of the DeFi sector, any sign of irregularity in its pools is cause for boasting.
Tyler Reynolds, a Web 3 investor who follows the stablecoin market, told Decrypt that concerns about the imbalance of the UST No Curve are “exaggerated”.
“More like a kind of automatic bandage machine. It is difficult to defeat her, but when you succeed, no one is capable of stopping her”, he said.
“Nagaking”, or pseudonym researcher of optimization in the pools of Curve, tells Decrypt that, in his opinion, “an imbalance like this is not really worrying”.
He explained that the “bonding” curves (process in which assets are sold to a protocol in exchange for their native token) are created in a way that “they have to have a certain asymmetry before they change too much or in price”.
“From the perspective [of the liquidity pool], there is only one big problem if the pool will never return to a 50/50 balance, corresponding to price parity. However, the imbalance is not a problem, but as the pool becomes more unbalanced and the prices deviate even more, it is obvious to become more and more worried that the balance between the price/pool may not return to normal”, explained nagaking.
Liquidations
Although the Curve pools will not be able to absorb such imbalances, the panic among investors resulted in large liquidations of UST that will go to other stablecoins, such as USDC.
Not that it was the largest liquidation of UST, or stolen Curve Whale Watching, which monitors and tweets about large amounts of conversions, showed a conversion of 85 million UST for 84.5 million USDC. The trader paid almost US$ 34 thousand in taxes on the liquidity pool.
Reynolds told Decrypt that there are also accounts of “people converting LUNA into UST and selling [UST] to [buy] USDC/USDT.
Traders who trade LUNA for UST is how a stablecoin maintains its stability. The system was created in a way that 1 UST can be exchanged for the equivalent of US$ 1 of LUNA at any time.
When UST falls below its US$1 mark on Saturday, arbitrators will take advantage of and negotiate LUNA to obtain UST at a discount, generating profit.
This mechanism helped to keep or weigh down UST because every time traders buy UST they convert to LUNA, or the Terra protocol, to remove these stablecoins from circulation. A press to buy UST helps keep or weigh down the stablecoin.
More sales pressure on Terra means that the price of LUNA could fall even more in an attempt to rescue the network’s native stablecoin, as well as what happened on Saturday.
Also, traders who take advantage of the UST stability mechanism or sell LUNA for UST prejudice or hinder when they sell large amounts of UST for other stablecoins, such as USDC, because it destabilizes the selling pressure of UST.
Since the ballast of UST needs to be defended by the sacrifice of the LUNA token, some traders are so pessimistic that they are able to bet thousands of dollars that the LUNA price will remain low (US$ 88) until March 2023.
“Lunatics”, as the supporters of the Terra ecosystem are called, we turn to recent events that made UST fall and continue at US$ 0.99 as a conspiracy against a stablecoin. Caetano Manfrini, legal representative of the Brazilian crypto group GEMMA Ecosystem, tweeted: