The UST crash

TerraUSD (UST) is an algorithmic stablecoin, which was recently the 3rd largest stablecoin by market value. UST is on the brink of collapse due to repeated failures to maintain the $1 peg. A peg is a 1-to-1 link to the underlying assets, where the price of 1 UST should be equal to $1.

Terraform Labs, the founder, and developer of Terra, on Thursday halted production of blocks “to prevent governance attacks after severe $LUNA inflation and significantly lower attack costs,” it wrote on Twitter. The cheap price of LUNA makes it possible for bad actors to cheaply get enough LUNA to attack the network by forcing a majority vote. Terra is a Proof-of-Stake network where owning coins gives direct power and voting rights to vote and propose changes on the network.

How does UST work and what happened?

Terra's UST sought to become a stable coin whose minting and burning process was programmatically executed by a computer program – an algorithmic process.

Terra “promises” that people can exchange 1 UST for $1 worth of LUNA (the value of which fluctuates freely according to supply and demand) at any time. If UST breaks its peg on the upside, arbitrageurs can exchange $1 worth of LUNA for 1 UST, taking advantage of the premium at a profit. If it breaks the link to the bottom, traders can exchange 1 UST for $1 worth of LUNA, thus also taking a profit on this trade.

This mechanism failed during a period of enormous stress on the network. When UST lost its 1-to-1 pairing, this resulted in a modern “bank run” where traders tried to exchange their UST for LUNA. This demand for LUNA was greater than Terra could handle, causing costs on the network to reach 40% of the given transaction. In its place, this caused another drop and resulted in a so-called “death spiral” for the Luna token.

Binance, one of the largest central exchanges, has delisted LUNA and UST, making it no longer tradable on this exchange. Whether there is a future for LUNA and UST is uncertain. These situations reiterate the importance of doing your own research and remembering that there are always risks. In times like these, it is important to take care of each other as a crypto community. People lost thousands of dollars in this crash. Support each other and remember that money is not the most important thing!

- The Knaken Team -