As a stablecoin, UST is designed to maintain its value at $1 at all times. However, unlike traditional stablecoins backed by actual US dollars, UST relies on financial engineering mechanisms to preserve its value. This system has been considered risky, as it requires investor intervention to push the price back to $1. Experts have pointed out that the system may struggle under unusual market conditions, particularly during periods of high volatility or massive one-sided trading activity.
This is part of the reason why UST has been unable to maintain its value. Over the weekend, significant amounts of UST were withdrawn from liquidity pools on Curve, a popular decentralized exchange. Simultaneously, $192 million worth of UST was sold off.
As the price of UST fell well below $1, investors have shown reluctance to buy and instead opted to sell.
How Are They Attempting to Stabilize the Price?
To maintain UST’s price at $1, investors have the option to burn their UST and receive new LUNA at $1 in return. This mechanism helps reduce the supply of UST and drives the price back up to $1. Conversely, when UST’s price rises above $1, investors can burn LUNA and receive TerraUSD.
Last week, Terra Labs, the company behind UST, purchased $1.5 billion worth of Bitcoin to act as a reserve for UST. The company plans to raise its reserve to $10 billion and has already accumulated $3 billion. According to the company, UST will become the first cryptocurrency backed by Bitcoin. Given Bitcoin’s recent decline, CryptoChipy has raised questions about how secure this strategy really is.
To maintain the USD peg, Terra Labs intends to lend out $750 million in Bitcoin to various trading firms. In addition, the company plans to use 750 million UST (roughly $750 million) to buy more Bitcoin. This strategy will allow trading on both sides of the market, helping to stabilize the price.
This new approach is already being tested, as the coin has shown signs of instability. Will UST and LUNA face a total collapse, or will they make a remarkable recovery? Regardless, Kucoin (review) remains a great platform for trading long and short positions on these coins. Try Kucoin today!
Wat is UST?
UST is classified as a stablecoin, meaning its value is designed not to fluctuate. Unlike assets like BTC, its price does not change according to market conditions; it is intended to always trade at $1. If the price deviates from $1, its stabilization mechanism ensures that the issue is corrected swiftly.
Currently, UST is the largest algorithmic stablecoin. It does not rely on USD-backed assets but instead maintains its value through the creation and destruction of its supply. UST is also the fourth-largest stablecoin, behind Tether (USDT), USD Coin, and Binance USD. Due to its popularity, UST is widely available for purchase and sale on most major crypto exchanges.
UST is part of the Terra network, which also supports other tokens such as Terra Euro and Terra Pound.
Conclusie
TerraUSD (UST) is a stablecoin designed to trade at $1. However, over the past 48 hours, it has failed to maintain this peg as millions of UST were dumped and withdrawn from liquidity pools on Curve. UST’s value is supposed to be maintained through a system of burning and creating new UST, but this has not been sufficient. In response, the company behind UST has been forced to purchase billions of dollars worth of Bitcoin to act as its reserve currency.
Stay updated on UST at CryptoChipy.
