The closely watched TerraUSD (UST) stablecoin briefly lost its dollar peg on Saturday, falling to .987 before bouncing back on Sunday. Its sister token, LUNA, fell 10%.
As the largest algorithmic stablecoin, UST has emerged as a major – albeit controversial – backbone of the crypto economy.
This weekend’s depeg was not the first (nor the largest) in Terra’s history, but it marks the first time the algorithmic stablecoin has lost its peg since it embarked on its much-publicized bid to build out Bitcoin and Avalanche reserves.
The depeg did not cause Terra to tap into its Bitcoin reserves on Saturday, as the deployment of hundreds of millions of dollars of rescue capital appeared enough to buoy the token back to around $1.
The de-pegging appeared to kick off with a series of major withdrawals from Anchor Protocol, a lending market that offers high yields to users who deposit UST. Over the weekend, Anchor’s total UST deposits fell from $14 billion down to $11.2 billion (UST’s total circulating supply is $18 billion).
Large quantities of UST were also withdrawn from liquidity pools on Curve, a decentralized finance (DeFi) protocol that allows users to swap between stable currencies like UST.
A $150 million liquidity withdrawal came from Terra creators Terraform Labs (TFL). TFL claimed Sunday they made the withdrawal as they were preparing to shuffle around funds between pools, but they re-deposited $100 million after realizing UST had begun to trade a discount relative to other stablecoins.
Adding a tinge of conspiracy to yesterday’s events, a single wallet also raised eyebrows for dumping $84 million worth of UST on Ethereum and $108 million on Binance. This has led to calls from within the Terra community that the depeg was a “coordinated attack.”
Do Kwon, the outspoken founder of Terraform Labs, chimed in on Saturday with a series of jokes and jabs at “anons” circulating “fud” (fear, uncertainty and doubt).
I’m up - amusing morning— Do Kwon 🌕 (@stablekwon) May 7, 2022
Anon, you could listen to CT influensooors about UST depegging for the 69th time
Or you could remember they’re all now poor, and go for a run instead
At one point, Kwon tweeted out a chart with the claim that one wallet was responsible for 62% of Anchor withdrawals. He quickly deleted the tweet, presumably after realizing that the “62%” figure on his chart referred to all “other” wallets rather than one specific wallet.
After Kwon started tweeting on Saturday, a single wallet appeared intent on rescuing UST’s peg. In the span of around 10 minutes, the wallet swapped over $200 million of UST for Tether in order to rebalance UST’s Curve pools thereby boosting its price. More swaps continued on Sunday morning as UST’s peg recovered.
Some have speculated that the savior wallet belongs to Jump Crypto, a financial firm with strong ties to Terra and Terraform Labs. Jump is the same firm that stepped in to backstop a $320 million exploit of Solana’s Wormhole bridge back in February.
What is Terra
UST relies on another token, LUNA, to keep its price of a dollar via a set of on-chain mint and burn mechanisms.
Recently, Do Kwon has made headlines for using Luna to buy up Bitcoin (and other cryptocurrencies) as a way to partially back UST. This has been framed as a way to secure Terra’s peg while maintaining decentralization, but the central role of Do Kwon and TFL in buying up Bitcoin has fueled claims that Terra is centralized.
Thus far there is no concrete link between Terra and its BTC/AVAX reserves, which led to questions on Saturday around if (or how) the currencies could have been deployed to defend Terra’s peg.
During this most recent event, the reserves have so far gone untouched.
Terra and Luna are currently the 9th and 10th largest cryptocurrencies by market cap according to CoinMarketCap.