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Crypto: LUNA plunges as UST stablecoin saga deepens

The value of LUNA plunged on Wednesday as Terraform Labs creator Do Kwon laid out a plan to save its sister token, the stablecoin TerraUSD (UST).

In the last 24 hours, roughly $10 billion have been drained from LUNA. Its price has fallen 93% in that time from $32 to $2.25 per coin, with the price changing rapidly each minute. After skidding to a low of 30 cents per coin, UST has ratcheted up more than a quarter to 64 cents.

On Twitter Wednesday, Kwon called for destroying a “billion in UST” while “significantly” diluting LUNA's price further.

The move comes after both UST and LUNA have lost tens of billions of dollars in value over the last week and as investors and analysts try to gauge what the potential demise of both coins could mean for the crypto sector.

According to Kwon’s tweets, the recovery proposal — which looks to be passed by vote from the Terra community — would allow investors to sell UST for LUNA, effectively adding price pressure to LUNA in an effort of bringing UST back to its $1 peg.

Acknowledging what this means for investors, Kwon said, “we will continue to explore various options to bring in more exogenous capital to the ecosystem,” adding that the team will also change UST’s peg mechanism “to be collateralized.”

Most stablecoins peg their value to another asset, most often the U.S. dollar, with the aim of wavering as little as possible from that asset’s value. The goal in doing that is to provide price stability for commercial payments and a safe haven from volatility for investors.

But UST is an algorithmic stablecoin, which primarily uses market mechanics to manage the asset peg by linking UST with its sister coin, LUNA. But the strategy appears to have created volatility for the stablecoin.

Down 30% in the last day after breaking its essential $1 peg over the weekend, UST trades at above 64 cents per coin while Terra’s LUNA token rebounded 61% to $2.25 after dipping below $1 at 9 a.m. New York time Wednesday.

“For investors, it's not about whether the UST-LUNA peg mechanism works anymore,” Walter Teng, a DeFi strategist with Fundstrat told Yahoo Finance. “It's about whether or not they think a VC will bail them out.”

During a Senate Banking Committee meeting yesterday, Treasury Secretary Janet Yellen addressed UST as a “run,” emphasizing why more than ever there is a need in the U.S. to pass speedy regulation on stablecoins.

“I think that simply illustrates that this is a rapidly growing product and that there are risks to financial stability and we need a framework that’s appropriate,” Yellen said.

“This is $18 billion in wealth that we’re seeing evaporate before our eyes, and people are losing money,” Todd Phillips, director of financial regulation and corporate governance at the Centre for American Progress added.

Though many analysts argue that the stablecoin’s design and its ability to weather tough markets bears the brunt of blame, Teng also went on to emphasize another “catalyst” for the stablecoin’s “de-peg” over last weekend.

Minutes after the Luna Foundation Guard (LFG), a nonprofit supporting the Terra blockchain, moved $150 million of UST liquidity Saturday from the decentralized exchange Curve, an unknown party sold $84 million UST, destabilizing the price. (Read more about that here.)

The mystery address was only one part of a much larger trade against UST with a number of short positions placed on centralized exchanges, according to a person familiar with the events since Saturday.

Still, the stablecoin’s design is the key culprit for its current woes, this person argued.

“The crash had nothing to do with blockchains/cryptocurrencies,” the source said. “It was just a stupid design that was never going to work.”

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David Hollerith covers cryptocurrency for Yahoo Finance. Follow him @dshollers.

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