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Terra’s stablecoin UST drops to its all-time low as the crypto market takes a swing lately. The coin, which was supposed to be close to $1, dropped to the $0.70 level, despite the large sum funneled in from the reserves. Experts believe that the fall should be analyzed with this ongoing crypto winter rather than the stablecoin’s ability to hold on in the short term.
Stablecoins are usually the hedging vehicles in the crypto market as there is a fear of volition. Commonly, the stablecoins act as a bridge between DeFi and TradFi and are responsible for significant liquidity from institutional investments. Popular stablecoins like USDT and USDC are backed by cash and the reserves in the bank.
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Unlike these stablecoins, Terra’s UST keeps the entirety of its operations with DeFi and keeps its value close to $1 through algorithmic connections with the network’s native token LUNA. The value is kept stable with a specialized mining process of LUNA which requires burning UST, and this algorithm involves several other steps to keep the value as stable and close to $1 as possible.
The price falls of UST are designed to stabilize itself by going along with the normal proceedings of the free market. When a buyer gets UST for $0.99 and sells for $1, the profit theoretically stabilizes the coin price. However, the theoretical success seems not to have worked in reality as the token explored new depths in price fall this weekend.
The fall was impactful for the stablecoin as the crypto market could not hold very well as the winter hit. As per the reports, the crypto market cap fell from $1.8 trillion to $1.4 trillion over the last five days. Following this, the UST price on Coinbase fell as low as $0.65.
The Luna Foundation Guard has been working on a fallback strategy for the last few months if the algorithm fails to hold up the value. As of May 3, the foundation purchased Bitcoin, Avalanche, UST, and LUNA worth approximately $4 billion for the reserves. Within a week since then, the foundation had to face the very situation it anticipated for months now.
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The foundation voted for a $750 million loan just as the price reached $0.985 for proactive defense against further decline. However, it has not made much difference, and UST fell 6% in just an hour last night. The LFG is planning to increase the loan amount to $1.5 billion in a desperate need to hold steady. Furthermore, experts are still unsure whether it is the result of an innate fault or the recent downswing of the crypto market.
