$UST’s collapse is the biggest threat to crypto. Is it the end of $UST and $LUNA?

LBank Exchange
3 min readMay 11, 2022

On May 9th, $UST hit a low of 0.6065 USDT, bounced back, and stayed at the level around 0.9 USDT once for about 15 hours. It crushed again after with $UST hitting a low of 0.67 USDT before bouncing back to the 0.8 USDT region (0.31 USDT when sending the article). Although the Luna Foundation Guard claimed that they will proactively defend the stability of the $UST peg, a de peg is still highly possible.

To understand, we need to understand the current model of Luna and UST.

$UST is a decentralized algorithmic stable coin. To be algorithmic, it is backed by an algorithm, not assets. $UST, also known as TerraUSD, produced by Terraform Labs, maintains its peg to the U.S dollar through a network of arbitrageurs, who buy and sell Terra’s volatile cryptocurrency, LUNA. LUNA is also a governance token and grants holders voting power over the protocol. Terra mints and burns tokens while incentivizing arbitrage to maintain its stable coins’ equilibrium. Before you can buy $UST, you’ll have to mint some. To do so, you’ll pay the going rate in Luna.

The protocol takes those LUNA and burns them. The same works in reverse: you’ll

convert UST stable coins to mint LUNA.

Here is the main point: To incentivize the arbs, $UST must possess true utility. And the anchor protocol provides the main utility- It provides a 20% yield and is currently responsible for 51.8% of $UST’s circulating supply. As the Borrow APR is only around 7.16%. The 20% Deposit APR is highly reliant on the Luna Foundation Guard sending money to Anchor Protocol’s yield reserve. And this is clearly unsustainable in its current state.

And this time, whoever pulled the trigger to massively short $UST might eventually send the protocol to zero. But Terra foundation had a plan for times like this. They have been buying almost $2B of bitcoin to protect the peg during times of extreme stress and now they are swapping $BTC to $UST to save $UST. However, the market hasn’t responded well to this- Dumping $BTC means making the whole market go down even harder. Currently, LFG is loading $750m in $BTC and $750m in $UST to market makers to recover the peg, and Do Keon also said he has the recovery plan for $UST. If you still hold $Luna or $UST, you can only hope that something good will happen. But even when $UST restores the peg, it already lost its trust.

Good Luck.

Not financial advice.