There were three stages to TerraUSD's (UST) demise. The peg of UST was first broken by two traders; it was then fixed by Terraform Labs and three supporters by buying $2 billion worth of UST; those funds, inflating the price of UST's sister token LUNA, and crashing the price of both LUNA and UST. So, how did UST lose its peg? It is likely that UST is more brittle than other stablecoin types because of its uncollateralized design.
How Did UST Lose Its Peg?
In an organized, public effort to transfer these money to another pool, Terraform Labs removed 150 million UST from 3pool, a decentralized stablecoin exchange, on the evening of May 7. As a result, the pool became more volatile and "shallow."
13 minutes later, a dealer exchanged 85 million UST for USDC, possibly exploiting this weakness. Another trader then exchanged a total of 100 million UST for USDC in increments of 25 million throughout the course of the following hour.
Terraform Labs responded by taking another 100 million UST out of 3pool. The ratio of UST to other stablecoins was supposed to be "rebalanced" as a result. But by that point, the peg on UST had already been broken by these substantial trades and a number of much smaller ones.
When the sell-off commenced, investors panicked, and many holders of USTs placed at Anchor started to withdraw their money.
UST's developers, Terraform Labs, run the DeFi protocol known as Anchor. It has offered 19.5% APY on any amount of deposited UST for the majority of its life. Then, at APRs that normally range from 2% to 15%, it lent these deposits. At any given time, just one-half to one-sixth of the deposited UST has been lent to borrowers.
More than 72% of all UST, according to a report from mid-April, were deposited in Anchor, suggesting that one major motivation for holding UST may have been to benefit from Anchor's yields.
On May 7, 8, and 9, three unnamed UST supporters exchanged a total of $480 million USDT for UST in order to fix the peg and rebalance 3pool. The Luna Foundation Guard (LFG) subsequently traded billions of dollars' worth of Bitcoin from its assets to exchange for UST on May 9. However, on May 10th, LFG's reserves had run out and UST had once more lost its peg, this time permanently. Several cryptocurrency exchanges blocked withdrawals in a last-ditch effort to halt the sell-off .
The biggest source of liquidity for UST was also running out. In contrast to the desired balance of 50% to 50%, 3pool's UST to 3CRV ratio was rapidly reaching 95% to 5%. This "basket" of stablecoins also contains USDC, USDT , and DAI.
There was just one value-preserving exit left. No matter the price of LUNA, a UST holder could always "burn" one UST to "mint" one dollar's worth of LUNA according to the stablecoin's algorithm.
Holders then collectively set fire to their UST, causing LUNA to soar. Prices dropped to cent-fifth ranges as supply reached the trillion dollar range. It became evident that not everyone could burn UST for the same value when LUNA's market valuation dropped below that of UST. When UST was worth barely a penny, the remaining holders sold at ever-lower prices. The computational stablecoin has failed.
Can UST Peg Be Restored?
Since TerraUSD is still far from its $1 peg, the UST recovery has not yet taken place.
The likelihood of the UST recovery, which would cause the stablecoin to repeg to $1, is now less clear. Although this repeg of UST appeared to be prioritized in Kwon's initial recovery plan, the community does not seem to concur. Instead of concentrating on Terra Luna and the Layer-1 before saving UST, they may have been blaming UST for the demise of Luna. So, I guess you are clear about “how did UST lose its peg?”
