TerraUSD stablecoin plunges

As crypto market awaits rescue.

TerraUSD, the struggling and controversial algorithmic stablecoin, plunged on Wednesday as crypto markets await a rescue led by primary backer Do Kwon.

The token plunged from its intended 1-to-1 peg to the US dollar to trade at around 40 cents at 9:10 a.m. in London, data compiled by Bloomberg show.

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TerraUSD, or UST, is the biggest algorithmic stablecoin by market value.

Over the weekend, the token lost its intended peg to the US dollar, falling to about 99 cents. A wave of selling followed, and by Monday evening UST had hit an all-time low of 60 cents.

On Tuesday, following an earlier tweet from Kwon that he was “close to announcing a recovery plan,” the token traded off the lows and rallied to a high of around 94 cents.

Unlike conventional stablecoins like Tether’s USDT or Circle’s USDC that are backed by real-world highly liquid cash equivalents or dollars, algorithmic tokens are designed to maintain their peg (and investor confidence) through a combination of mathematical equations and active trading.

In the case of UST, investors can exchange one unit of the token, no matter what price it’s currently trading at, for $1 worth of Luna. The embedded arbitrage trade helps keep UST at or close to $1, or so the theory goes.

Kwon and a group of investors known as the Luna Foundation Guard had previously issued $1.5 billion in loans denominated in both Bitcoin and UST to external firms in an attempt to support the peg.

© 2022 Bloomberg L.P.

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