The algorithmic stablecoin UST, which is part of the Terra crypto ecosystem, is struggling to maintain parity with the dollar following a Saturday market event.
During the market event, the price of UST hit a low of $0.9857 on Binance against USDT. This trading pair is the most voluminous for UST, with $1.36 billion in volume reported in the past 24 hours.
As previously reported by The Block, UST is an algorithmic stablecoin, meaning that it relies on market incentives to maintain its peg. In addition to a burn mechanism involving the LUNA token, which is used as part of Terra's governance process, UST is also backed by an ever-increasing reserve of digital assets like bitcoin that can be used to defend the stablecoin's market parity with the dollar.
It's unclear at this time precisely why the market event took place. Crypto researcher Mika Honkasalo noted a significant swap of UST for USDC, another stablecoin, on Curve. In fact, following the loss of parity, many UST holders have been swapping their UST for various stablecoins in Curve’s 53 meta pool – evidenced by the imbalance of the pool’s liquidity.
Later Saturday, Honkasalo noted that "keeping the UST peg is leading to hundreds of millions in on-chain ETH sales. Who knows how much crypto is being sold by these entities on CEXs to try & push UST back to $1."
In the period after the loss of parity, Terraform Labs co-founder Do Kwon took to Twitter to post "I’m up - amusing morning."
A market recovery began to take shape following Kwon's tweet. Parity with the dollar appears to have remained elusive. At press time, UST is trading at $0.9939 on Binance.
LUNA is currently trading at $61.10, according to CoinGecko data, down close to 16% in the past 24 hours.
As might be expected, crypto social media was aflame with speculation and heated conversation, with some claiming that the event represented a coordinated effort against UST and Terra.
Saturday's event wasn't the first time UST has slipped below dollar parity. In May 2021, UST suffered what the Terra team called "extreme volatility" and temporarily fell as low as $0.96 before recovering.
Looking beyond crypto, turbulence hit global markets this past week, corresponding with bitcoin's fall on Thursday. Last week, the Federal Reserve raised interest rates by half a point.
At least one market observer suggested that the combination of the crypto and macro sentiment could amplify the significance of the market event.
"It’s not a big nor sustained depeg, but given the LFG has been one of the largest BTC buyers of 2022 and the overall weak macro climate, it certainly puts the community on edge," GSR Markets co-founder Rich Rosenblum told The Block.