UST: the stablecoin that's shaking up the crypto world

It's fair to say we had a nose for trouble when we brought you a full feature on stablecoins in the Premium edition last week. UST, the stablecoin of the Terra ecosystem ($19 billion in capitalisation before its fall, $14 billion currently), has just lost parity with the dollar and dragged the entire crypto market down with it.

On Monday night, it fell to $0.60, before recovering on Tuesday to around $0.90 and falling back to $0.80 in the evening. This may seem insignificant, but the raison d'être of a stablecoin is to track the price of the asset to which it is indexed. By losing parity, it no longer serves any purpose, which is more than problematic for the 3rd largest stablecoin on the planet...

UST price:

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What happened? To understand this, we need to go back to 7 May, when massive withdrawals of USTs were observed from the Anchor lending platform. Several billion dollars worth of UST were then sent to the decentralised exchange Curve, which specialises in stablecoin trading. The aim? To sell all these USTs on the markets. The immediate result of this operation was that the balance of a liquidity pool was affected by too many USTs in circulation, causing it to lose its peg to the dollar.

Unlike centralised stablecoins (such as the USDT and USDC), whose parity is ensured by dollar reserves in a bank account, the UST is based on an algorithmic mechanism. When there are too many USTs in relation to demand, the price falls. The value of the UST can therefore theoretically fall to zero if there is too much supply.

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