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⚡️It is for this reason that an arbitrage mechanism has been put in place to ensure its parity with the dollar.

When the UST falls below one dollar, holders can burn their UST to obtain one dollar of LUNA (regardless of the UST's price), the utility cryptocurrency of the Terra blockchain. This reduces the supply of USTs available and helps to stabilise its price. Conversely, when the UST price is higher than the dollar, users can burn LUNA to obtain USTs. Got it? Except that this beautiful mechanism has seized up...

Massive exchanges on the Curve platform caused the UST to fall, sending it below the 1 dollar mark. As a result, other people began to take advantage of the arbitrage to burn USTs against LUNAs in a bid to sell the latter. The scale of the movements prevented the UST from recovering against the dollar as the Luna price collapsed. In the space of a week, the latter lost 65% of its value, despite being one of the star cryptos of recent months!

The Luna Foundation Guard, the Singaporean structure responsible for ensuring that UST parity is maintained, raised $1.5 billion at the start of the week by pledging its bitcoin reserve as collateral, but this emergency rescue was apparently not enough. According to US media outlet The Block, on Tuesday the foundation asked several funds for help in raising a further billion dollars to recapitalise UST. Potential saviours could benefit from half-price LUNA tokens with the obligation to hold them for at least two years.

It's pretty clear that we are witnessing a crisis of confidence in the third-largest stablecoin on the market. We have to consider the possibility that it may never be regained, but the consequences could be contained. UST is only rarely used in decentralised finance with the exception of the Anchor application and a few liquidity pools on Curve (but their weight has largely fallen with the events).

So we can put off the risk of contagion, at least in the short term. But what about afterwards? Especially as this affair has not come at the best of times... The markets are fragile and the slightest spark can set things alight. One more piece of bad news like this and Bitcoin would have no trouble breaking the $30,000 support on which investors' eyes are feverishly fixed.

Article produced with the participation of Artem Sinyakin (OAK Invest)

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