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.
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.