After Terra had an unprecedented crash, which had meanwhile destroyed 96 percent of the Luna course, Tether is now also faltering. Stablecoins appear to be losing investor confidence.
After already very turbulent days, things have become even more turbulent for the Terra network and the coins Luna and UST in the last few hours. At the time of writing this post, Luna price had fallen over 97 percent in 24 hours. The coin has been extremely volatile with 24-hour highs and lows at $5.45 and $0.04.
Unprecedented crash increases nervousness
The price of the stablecoin in the Terra network, the Terra USD coin (UST), on the other hand, is showing an upward trend again, even if it is currently a long way from being tied to the value of a dollar at $0.59. Within the past 24 hours it has fluctuated between 0.30 and 0.82 dollars, which is making the market and politicians quite nervous.
The UST is a so-called algorithmic stablecoin whose peg to the dollar is not collateralised with hard currency. The decoupling unbalanced the Terra Network’s Combustion and Mint mechanisms. This led to a loss in value of the magnitude already mentioned, which seemed catastrophic.
UST is to be secured, investors are apparently not interested
In the wake of the crash, Terra founder Do Kwon has now announced that the UST will also become a collateralized stablecoin in the future. Do Kwon therefore intends to stabilize the value of the stablecoin by depositing valuable assets.
This is in line with the strategy behind the stablecoins USD-Coin and Tether and is said to be provided by the Luna Foundation Guard, a Singapore-based non-profit organization that supports the Terra Network. As reported by The Block, citing “people familiar with the matter”, the LFG aims to raise more than $1 billion to hedge the UST stablecoin. That doesn’t seem to be going smoothly, as Bloomberg reports. The newspaper reports that large investors who have already been contacted by LFG would give the plan the “cold shoulder”.
Tether is also breaking away from the dollar
The possible impending total loss of all investments in the Terra network is meanwhile worrying politicians and investors to such an extent that even the secured stablecoin Tether has now detached itself from the dollar peg and fell to $0.95 on Thursday morning.
Bitfinex CEO Paolo Ardoino immediately took to Twitter, assuring investors that the commitment was not in question. Investors would always be paid at least a dollar. According to Bitfinex, around 80 percent of the tether is secured by cash deposits and only 20 percent by other, various assets.
The actual degree of coverage of the tether has repeatedly been a point of attack for criticism in the past because there is no objective evidence of how high it actually is and what the specific collateral strategy looks like. This has already been the subject of legal disputes, from which Bitfinex usually drew comparisons.
US Treasury Secretary wants stablecoin law
US Treasury Secretary Janet Yellen sees her crypto criticism confirmed by the Luna crash. She said during a Senate hearing this week, “A stablecoin known as Terra-USD experienced a run and lost value. I think that shows that we’re dealing with a fast-growing financial product that also has fast-growing risks.”
In this regard, she announced that the US Treasury Department will soon issue a comprehensive report on cryptocurrencies and stablecoins. Likewise, Congress is working on stablecoin legislation, which she hopes to see passed by the end of 2022.
Those interested in crypto should not get the idea of using the “dip” to get started. After all, on April 5, 22, Luna was able to announce that it had reached an all-time high of $119.18. At the moment nobody can seriously rule out the total loss of all funds.