UST Stabilizes Around $0.90, LUNA in Low $30s After Historic Volatility

Key Insights:

• UST has stabilized near $0.90, after going as low as $0.60 in early Tuesday trade.
• LUNA has stabilized in the low $30s, after dropping more than 50% in one day on Monday.
• Binance has temporarily halted UST and LUNA withdrawals while the LFG has emptied its BTC reserve.

Having cratered as low as $0.60 in the early hours of Tuesday (according to FTX’s trading book), Terra’s flagship stablecoin TerraUSD (UST) has stabilized in the $0.90 area, up around 20% on the day versus Monday’s closing levels around $0.75.

UST, an algorithmic stablecoin that is supposed to be pegged 1:1 in value to the US dollar, initially came under pressure on Saturday, when it dropped as low as $0.98 on the dollar.

But a cascade of risk aversion in the broader cryptocurrency market on Monday saw UST’s losses really cascade.

As UST slid, LUNA, the native token of the Terra blockchain, came under intense selling pressure. LUNA/USD shed over 50% of its value on Monday, a historic drop for a cryptocurrency of LUNA’s size, to fall from about $65 per token to just over $30 per token.

After dipping as low as the $23.00s in the early hours of Tuesday trade, LUNA/USD is now consolidating in the low $30s. On the week losses currently stand at just under 50%, following last week’s losses of just over 20%.

LUNA is now down more than 70% from the record highs it printed back at the start of April near $120, shedding more than $30 billion in market capitalization in the process.

LUNA’s latest drop in market capitalization has seen it fall out of the top ten cryptocurrencies by market cap. It is now in 13^th place, with a market cap of just under $12 billion.

UST seeks to maintain its peg to the US dollar through the utilization of an arbitrage mint-burn mechanism with LUNA. One UST can be swapped for $1.0 worth of LUNA at any time or vice versa.

As a result, when UST supply rises sharply (as has been seen amid the recent de-peg), this can result in heavy selling pressure on LUNA. Given that the market cap of LUNA has now fallen below the market cap of UST, some worry that UST might now be undercollaterized.

Binance temporarily suspends UST, LUNA withdrawals

A recent announcement from Binance that they would be temporarily suspending the withdrawal of both UST and LUNA may be helping to bring back some stability. The freeze on transactions should, at the very least, slow the pace of capital flight out of both cryptocurrencies.

“Withdrawals for LUNA and UST tokens on the Terra (LUNA) network were temporarily suspended on 2022-05-10 at 02:20 AM (UTC) due to a high volume of pending withdrawal transactions. This is caused by network slowness and congestion.

Binance will reopen withdrawals for these tokens once we deem the network to be stable and the volume of pending withdrawals has reduced. We will not notify users in a further announcement. We apologize for any inconvenience.”

Luna Foundation Guard empties reserves

Despite the best efforts of leading figures with the Terra community to shore up confidence and Binance’s withdrawal freeze, UST still remains more than 10% below its peg.

But crypto analysts are concerned about the fact that the Luna Foundation Guard (LFG), a non-profit organization built to support the development of the Terra ecosystem, has already emptied its entire bitcoin (BTC) reserve.

LFG had been building up a reserve of bitcoin in recent weeks in the wallet address “bc1q9d4ywgfnd8h43da5tpcxcn6ajv590cg6d3tg6axemvljvt2k76zs50tv4q” to help back the UST stablecoin. On Monday this reserve stood at 42,530 bitcoins.

This bitcoin wallet had now been completely emptied, with the bitcoins thought to have gone to Gemini Exchange wallets.

The emptying of LFG’s wallet comes after they pledged to loan out $750 million in bitcoin and $750 million in UST to shore up the UST peg on Monday.

FUD about whether LFG and Terra’s founders Terraform Labs have the resources to defend the UST peg is set to remain elevated.