Why did $UST Depeg?

  1. The Future of Crypto
Photo by Wance Paleri on Unsplash

If you have paid any attention to crypto news within the past few days, $LUNA and $UST have been all the talk. With crypto markets in shambles, these two coins have been hit the hardest. With $LUNA sitting at roughly $1 from all-time highs of $119 (April 4th, 2022), this 94% drop in token value is not one taken lightly. The counterpart, $UST, is a stablecoin similar to USDT or USDC, which is “pegged” to the dollar. Essentially this just means that the price of these coins should always stay at the $1 mark. Just yesterday, $UST dipped all the way down as low as $0.27 and is currently hovering around the $0.75 mark. The biggest question today is, how in the world can a stable coin like this just suddenly “depeg,” and what does this mean for the future of crypto.

The way $UST and $LUNA functions is that $LUNA is able to be traded for $UST and vice versa. You are always able to redeem 1 $UST for 1 $LUNA. The idea is:

— The more $UST, the less $LUNA
“If there’s unstoppable demand for $UST and you’re the last $LUNA holder on earth, you have immense redemption power.”

$LUNA’s sharp drop in price completely affects $UST’s market as well. As $LUNA falls, $UST is redeemed for $LUNA. This is bad.

An example:

“It’s useful to illustrate using extremes. Say the price of $LUNA is $1 billion. Then someone could mint 1 billion $UST by burning a single $LUNA. Then let’s say the price of $LUNA falls to $1 for no good reason. That person could redeem their UST for 1 billion $LUNA.”

What this results in is that a lot of $LUNA ends up being dumped into the market.

“As with all algo stables, the downside cycle is the opposite of the upside:
— $UST unstaked and dumped
— $UST depegs due to downward pressure
— $UST holders redeem for $1 of $LUNA
— Dump $LUNA”

This news with $LUNA and $UST is not one to be taken lightly, with many invested in the Anchor Protocol (where you can stake $UST), this dump in both coins has caused billions of dollars lost.

The Future of Crypto

Dips in crypto is totally normal. Let’s take a look at BTC in May 2021:

Month of May between blue bars

Dropping roughly by 20,000, these dips are completely normal. Especially considering today’s economy/financial markets and news around the world, there are no signs of an end to this blood bath.

However, with that being said, watching $UST depeg like this and $LUNA’s complete drop is not one that anyone could expect. With more investors taking in the news, this will definitely cause much thought and new procedures to take place in the future.

For all crypto investors out there, I wish you the best of luck.