TerraUSD (UST), an algorithmic stablecoin hosted by the Terra network and created by South Korea’s Terraform Labs, has once again lost its dollar peg after a wave of sell-offs hit the crypto market.
The stablecoin, which is supposed to maintain a value of USD 1 by creating and destroying supply through a swap with Terra’s governance and staking token LUNA, dropped to as low as USD 0.666831 at one point over the past 24 hours, according to CoinGecko.
UST’s depeg prompted the Luna Foundation Guard (LFG), a nonprofit organization dedicated to maintaining the stability of the UST peg, to interfere and lend out USD 1.5bn in Bitcoin and UST to defend the peg.
The action has ostensibly helped UST recover towards its peg. At 7:49 UTC, the 10th coin by market capitalization is trading at USD 0.894706, closer to its dollar peg.
UST 7-day price chart. Source: coingecko.com
While the situation is still ongoing, a number of conspiracy theories are floating around the crypto community, speculating what could have led to UST losing its peg.
As pointed out by Ran Neuner, co-founder and CEO of Onchain Capital, a blockchain investment fund and advisory service, one speculation is that the attack on UST was coordinated by major investment firm Citadel.
This seems highly plausible given their anti- Bitcoin stance,” Neuner argued. “Also, when [Terra CEO Do Kwon]/LFG publicized they would protect the peg at certain level it was an invitation to attack. Wall Street are experts at this.”
Bitcoin trader Jacob Canfield even expanded on the theory that Citadel was the “culprit” of the UST depeg. He claimed that the investment firm borrowed a large amount of BTC, traded some for UST, and started dumping its BTC and UST after opening a short position.
Others drew parallels between UST’s depeg and how Fir Tree Capital Management, a USD 4bn hedge fund, wanted to short tether (USDT) earlier this year.
Meanwhile, Larry Cermak, the director of research and analysis at The Block, said that Jump Capital, Alameda Ventures, and other VC firms might provide another USD 2bn to help bail out UST.
“Whether this rumor is true or not, it makes perfect sense for them to spread,” Cermak said. “The biggest question here is, even if they can get it to [USD] 1 by some miracle, the trust is irreversibly gone.”
However, some noted that even another USD 2bn would not be of much help given that UST’s market capitalization exceeds USD 16bn.
While there are different theories when it comes to how UST could have lost its peg, there seems to be some form of consensus that the so-called decentralized stablecoin is neither truly decentralized nor stable.
“No matter how this ends, I don’t want people to call UST decentralized again. Even the little collateral backing it has is intransparent and controlled by a single party,” said Hasu, research collaborator at crypto-focused investment firm Paradigm.
Some noted that decentralized finance (DeFi) at large is more of an experiment at this point, with the majority of projects trying to achieve true decentralization over time.
“I don’t even think Do Kwon thinks it’s fully decentralized right now. But its something we are all building towards,” one crypto user said.
In the latest update, the LFG shared on Monday that the organization withdrew around BTC 37,000 (1.18bn) to loan out to market makers.
“Very little of the recent clip has been spent but is currently being used to buy UST,” the LFG said, noting that this was the last clip.
Meanwhile, major crypto exchange Binance announced today that withdrawals for LUNA and UST tokens were temporarily suspended due to a high volume of pending withdrawal transactions, which is caused by network slowness and congestion, they said. Withdrawals will be reopened when the exchange deems the network to be stable and the volume of pending withdrawals has reduced.