Crypto

Luna (Terra): an attempt to manipulate the protocol?

While the entire crypto market was in the red over the weekend, Terra (LUNA) faced a significant decline and its own US dollar-backed stablecoin, TerraUSD (UST), struggled to maintain its parity.

Source: Adobe

UST is an algorithmic stablecoin that relies on market incentives to maintain its dollar peg. In addition to the LUNA token burn mechanism that is used as part of Terra’s governance process, UST is also backed by an ever-growing pool of digital assets, including bitcoin, that can be used to protect the stablecoin’s market parity with the dollar. When the UST value exceeds $1, the Terra protocol prompts users to burn the LUNA and activate the UST. Conversely, when the price of UST falls below $1.00, the protocol rewards users for burning UST and hitting LUNA.

It appears that UST’s decline began following the massive withdrawals from Anchor, a DeFi protocol that offers one of the highest rates of return on the market to users who deposit UST. The LUNA/USD pair fell 20% between May 7 and May 8 to hit $61, its lowest level in three months, after the portfolio liquidated $285 million UST. Following this drop, UST briefly lost its peg to the US dollar, dropping to $0.98. To some observers, this sale operation resembles a deliberate and coordinated attack.

For his part, Do Kwon, the founder of the Terra Protocol, doesn’t seem to be overly concerned and has opted for humor to defuse the tense situation on Twitter. Some have noticed that there was one wallet behind the Terra rescue operation in particular, believed to be owned by Jump Crypto, a financial company associated with Terra and Terraforms Labs. The same company would also step in to support Solana after the attack on the blockchain via the Wormhole Bridge.

This Monday, the Luna Foundation Guard (LFG) announced that it will allocate $750 million in Bitcoin and $750 million in UST stablecoins to protect the latter’s parity during this period of market volatility.

Do Kwon added that while UST buying and selling does not have significant direction at this time, “we felt it was important to have capital ready to be deployed in the current market.” He also wrote that “as the markets recover, we expect the loan to be repaid to us in BTC, which will increase the size of our total reserves.”

This is not the first time that the parity between the dollar and UST has fallen below 1. In May 2021, the UST faced “extreme volatility” and temporarily dropped to $0.96 before recovering. It should be noted that, despite the difficult situation in the crypto markets, LFG has begun to additionally acquire bitcoins. Luna Foundation Guard reserves are currently distributed as follows: 93% denominated in BTC, 3.5% in Luna and 3.5% in AVAX (Avalanche).

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