Terra’s LUNA continued this week of slide as they fell 90% to reach price levels previously seen in August 2021.
The two main tokens from embattled crypto project Terra are now in freefall.
UST, a so-called stablecoin that’s meant to maintain a 1:1 peg with the U.S. dollar, plunged to as low as 31 cents Wednesday. It was last trading at less than 50 cents, according to CoinGecko data.
Anchor, the decentralized finance (DeFi) platform that provides yields on UST deposits, saw total value locked (TVL) fall by $11 billion in the past two days. The drop came as TVL peaked at $17 billion just a week ago.
LUNA is unique in that it reached an all-time high of $119.18 just over a month ago and has since lost almost 92 percent of its value, making it one of the fastest-declining cryptocurrencies with a market capitalization of nearly $37.4 billion lost in less than five weeks.
Selling pressure on LUNA came after its parent foundation issued 46 million tokens in the previous day to keep UST tied to the US currency.
The price action represented one of the biggest drops for a major cryptocurrency. Data shows LUNA prices have dropped 90% in the past week and 7% in the past hour alone. The tokens are now down 92% since lifetime highs of $119 in April 2022, just more than a month ago.
Bitcoin and ether saw more muted moves, initially falling before rising slightly. Bitcoin was up 1% at about $31,609 while ether rose 2% to $2,419.
Stablecoins are akin to bank accounts for the crypto economy, offering a sound store of value to avoid the kind of volatility cryptocurrencies like bitcoin have become notorious for — in theory, at least.
UST is what’s known as an “algorithmic” stablecoin. It uses a complex system of minting and burning tokens to adjust supply and stabilize prices. UST’s price has crumbled under the pressure of a sell-off in cryptocurrencies recently, resulting in further panic in the market.
Why the drop ?
Terra’s elastic monetary policy uses LUNA as a collateral asset to keep the currency peg at UST. The Terra protocol incentivizes users to burn LUNA and mint UST when the value of UST exceeds $1.00. When the price of UST falls below $1.00, the system compensates users who burn UST and mint LUNA.
This implies that LUNA’s value should fall as UST supply is reduced. Similarly, if UST’s supply grows, LUNA’s value rises, according to Will Comyns, a Messari researcher. For the first time in two months, the UST market contracted on May 8, falling by 28.1 million below zero. LUNA’s supply increased by over 436.75 million over zero at the same time.