UST Stablecoin Briefly Loses Peg, Luna Drops 10%

The Saturday event led to questions about whether Terra’s bitcoin reserves will soon face their first test

AccessTimeIconMay 8, 2022 at 6:01 p.m. UTC
Updated May 9, 2023 at 3:45 a.m. UTC

The closely watched TerraUSD (UST) stablecoin briefly lost its dollar peg on Saturday, May 7, falling to $0.987 before bouncing back on Sunday. Its sister token, LUNA, fell 10%.

As the largest algorithmic stablecoin, UST has emerged as a major – albeit controversial – backbone of the crypto economy.

UST's loss of its $1 peg this weekend wasn't the first or the largest "depegging" event in Terra’s history, but it marks the first time the algorithmic stablecoin has fallen below $1 since it embarked on its much-publicized bid to build out its bitcoin and avalanche reserves.

Losing the peg didn't cause Terra to tap into its bitcoin reserves on Saturday, as the deployment of hundreds of millions of dollars of rescue capital appeared enough to buoy the token back to around $1.

What happened

The depegging appeared to kick off with a series of major withdrawals from Anchor Protocol, a lending market that offers high yields to users who deposit UST. Over the weekend, Anchor’s total UST deposits fell from $14 billion to $11.2 billion (UST’s total circulating supply is $18 billion).

Large quantities of UST were also withdrawn from liquidity pools on Curve, a decentralized finance (DeFi) platform that allows users to swap between stable currencies like UST. A $150 million liquidity withdrawal came from Terra creators, Terraform Labs, which claimed Sunday that it made the withdrawal as it was preparing to shuffle around funds between pools, but it redeposited $100 million after realizing UST had begun to trade a discount relative to other stablecoins.

Adding a tinge of conspiracy to Saturday’s events, a single wallet also raised eyebrows for dumping $84 million worth of UST on the Ethereum blockchain and $108 million on the Binance crypto exchange. That led to calls from within the Terra community that the depeg was a “coordinated attack.”

The response

Do Kwon, the outspoken founder of Terraform Labs, chimed in on Saturday with a series of jokes and jabs at “anons” circulating “fud” (fear, uncertainty and doubt).

At one point, Kwon tweeted out a chart with the claim that one wallet was responsible for 62% of Anchor withdrawals. He quickly deleted the tweet, presumably after realizing that the “62%” figure on his chart referred to all “other” wallets rather than one specific wallet.

After Kwon started tweeting on Saturday, a single wallet appeared to be intent on rescuing UST’s peg. In the span of around 10 minutes, the wallet swapped over $200 million of UST for tether in order to rebalance UST’s Curve pools thereby boosting its price. More swaps continued on Sunday morning as UST’s peg recovered.

Some have speculated that the savior wallet belongs to Jump Crypto, a financial firm with strong ties to Terra and Terraform Labs. Jump is the same firm that stepped in to backstop a $320 million exploit of Solana’s Wormhole bridge back in February.

What is UST?

UST relies on another token, LUNA, to keep its price of a dollar via a set of on-chain mint and burn mechanisms.

Recently, Kwon has made headlines for using LUNA to buy bitcoin and other cryptocurrencies as a way to partially back UST. That has been framed as a way to secure UST’s peg while maintaining decentralization, but the central role of Kwon and Terraform Labs in buying bitcoin has fueled claims that Terra is centralized.

Thus far there is no concrete link between UST and its BTC/AVAX reserves, which led to questions on Saturday around if or how the currencies could have been deployed to defend UST's peg. During this most recent event, the reserves have so far gone untouched.

UST and LUNA are currently the 9th and 10th largest cryptocurrencies by market cap according to CoinMarketCap.

Luna’s price has fallen 10% in the past 24 hours and is now worth $66 according to CoinGecko. UST has mostly recovered its peg and is now trading at $0.998.


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Sam Kessler

Sam is CoinDesk's deputy managing editor for tech and protocols. He reports on decentralized technology, infrastructure and governance. He owns ETH and BTC.