The collapse of Terra's UST stablecoin and governance token LUNA became the biggest story in the craziest week in crypto history. So how did UST lose its peg and what caused UST crash?
How did UST lose its Peg?
In the early hours of May 16, the night sky turned copper-red as the year's lone lunar eclipse summoned a rare blood moon. For holders of the LUNA cryptocurrency, this phenomenon must feel like a joke from heaven. A few days ago, the Terra blockchain's native assets plummeted from $80 per token to under $1, wiping $40 billion in value in an event known as Mt. Gox 2.0.
The disaster was triggered by the failure of Terra’s algorithmic stablecoin UST, setting off a “death spiral” that slashed the dollar-pegged asset to just cents and devalued the LUNA token by 99% of its value.
After the passage of Proposition 20 in March, what started out as 20% and was billed as "stable" began to steadily decline. This proposal means that if Anchor's reserves increase by 5%, the interest rate will increase. If those reserves were reduced by 5%, interest rates would also fall.
As seasoned cryptocurrency watchers attest, the long-term success of a project depends on the quality of the code and the sustainability of the incentives. Terra has capable developers, but the network incentives seem dubious at best. As early as last year, critics discussed flaws in the UST algorithmic model and highlighted possible attack vectors.
The prophecy finally came true on May 7, when the Terra network succumbed to the kind of attack its critics had long predicted. Whether it is the coordinated attack of the rich whales or the work of the lone wolves is yet to be determined, but it is indisputable that the economic model of UST is an accident waiting to happen.
The USD peg fell to $0.98 as wealthy players sold UST on the Curve protocol, and that was just the beginning. Savior leader Du Quan (Terra puppet), known for his humility, shrugs it off, thinking it's just a speed bump, but the fatal blow has been struck. Over the next five days, UST and LUNA started a game. Even if the Luna Foundation's massive Bitcoin reserves were sold off, it wouldn't be enough to restore the UST peg.
What caused UST Crash?
TerraUSD (UST) crashed in three stages. First, two traders broke the UST peg; next, Terraform Labs and three backers repaired it by buying $2B UST; finally, the ongoing sell-off drained the funds, leaving UST's sister The token LUNA is overinflated and the price of LUNA and UST plummets
According to reports, the root cause of UST's loss of the peg was due to UST's deposits on the Anchor protocol. The Anchor protocol acts as a money market for stablecoins. As it happens, UST is highly reliant on Anchor, which has been a source of criticism leading up to this incident.
So I hope this article will help you to know how did UST lose its peg and what caused UST crash. Eventually, the price of LUNA continued to plummet as people gave up on UST and then sold their LUNA, until eventually, the price of LUNA was so low that there was not enough runway for UST, creating a lot of bad debt.
