TerraUSD(UST), Terra’s algorithmic-based stablecoin pegged to the dollar, has dropped sharply to nearly $0.4. As a result, the Terra blockchain’s native token, LUNA, dropped by 90% on Wednesday morning.
TerraUSD has lost its dollar peg for the second time in three days.
At the time of writing, LUNA was worth $3.1, representing an 89.52% loss. The token is currently trading at 97% less than its peak, which was $119 last month. The market capitalization of LUNA is $1.65 billion, while the market capitalization of UST is $7.95 billion.
TerraUSD is an algorithmic stablecoin with a fixed value of $1. Unlike other stablecoins, TerraUSD maintains its peg through an algorithm that moderates supply and demand in a complex process involving the use of another balancing token, LUNA.
When UST falls below $1, traders can “burn” coins, removing them from circulation, for $1 of LUNA. This reduces the supply of UST, raising its value once more. If UST rises above $1, traders sell luna to convert it into UST, causing its price to fall.
According to analysts, the attempt to keep Terra’s price at $1 to protect it from further loss is actually causing prices to fall further.
The substantial selling of UST compelled its developer group, Luna Foundation Group (LFG), to intervene and pledge to support the stablecoin.
As UST began to fall over the weekend, multiple crypto observers saw large token withdrawals from Anchor Protocol, which functions as a UST bank. According to the crypto news site CoinTelegraph, one large holder sold $285 million worth of the token.
LFG announced Monday in a tweet that it would lend bitcoin to trading firms. It later tweeted, “Deploying more capital steady lads.”
The price fall has weighed heavily on Bitcoin (BTC), which slid below $30,000 on Tuesday for the first time since last July. It has already lost 33% this year and is more than 60% below its all-time high of $69,000 set in November of last year.
BTC was trading 1% higher at $31,705 at the time of writing on Wednesday.
Binance, one of the top global crypto exchanges, temporarily halted the withdrawal of UST and LUNA due to increased volatility.
The carnage results from a global sell-off caused by intense volatility in the broader financial markets, which has made investors worried about rising interest rates and inflation.