What triggered the collapse of the UST?
Three Stages of the UST Collapse
UST is an algorithmic stablecoin. Its main advantage was that it was decentralized (i.e., it did not have a single point of failure). But it was this technology that allowed the crash to happen.
Two traders break the UST peg to the dollar
Two traders break the UST peg to the dollar
Source: https://blog.chainalysis.com/reports/how-terrausd-collapsed/
May 7 night - Terraform Labs withdraws 150 million UST from 3pool (decentralized stablecoin exchange) in order to transfer them to another. Such actions made the pool smaller, i.e. prone to volatility. One of the traders took advantage of this, perhaps deliberately.
While Terraform Labs was performing the operation described above, the trader, 35 minutes after it starts, exchanges 100 million UST for USDC, in 25 million increment.
Terraform notices this, and in order to prevent anything bad from happening, they withdraw another 100 million UST from 3pool in response. This was necessary to balance the ratio of UST and other stablecoins. But no avail - by this time, the algorithmic stablecoin had lost its peg to the dollar.
While Terraform Labs was performing the operation described above, the trader, 35 minutes after it starts, exchanges 100 million UST for USDC, in 25 million increment.
Terraform notices this, and in order to prevent anything bad from happening, they withdraw another 100 million UST from 3pool in response. This was necessary to balance the ratio of UST and other stablecoins. But no avail - by this time, the algorithmic stablecoin had lost its peg to the dollar.
Trying to fix everything
Reputation and millions of dollars were at stake, everyone suffered from the collapse of UST - the community, investors of different levels, and Terraform Labs itself.Attempts have been made to fix it:
Attempts have been made to fix it:
Attempts have been made to fix it:
- Three unknown fans of the algorithmic stablecoin were exchanging USDT for UST for three days (May 7, 8, and 9). The total amount of such exchanges reached 480 million US dollars. Luna Foundation Club is selling billions of dollars worth of bitcoin from its reserves on May 9th.
Source: https://blog.chainalysis.com/reports/how-terrausd-collapsed/
2. Luna Foundation Club is selling billions of dollars worth of bitcoin from its reserves on May 9th.
Source: https://blog.chainalysis.com/reports/how-terrausd-collapsed/
3. The end came on May 10th, when the LFC's stocks were depleted and the UST peg to the dollar could be forgotten.
Conclusion
Stablecoins are currently an indispensable tool in the world of cryptocurrencies. Traders actively use them on exchanges for trading. And most often, if necessary, they exchange stablecoins for fiat. Now, thanks to this technology, trading has become convenient and fast.
It cannot be said that the collapse of UST was the cause of the bear market, as many factors contributed to this: the macroeconomic and political situation in the world, the withdrawal of funds to fiat by large players, the increase in the Fed rate, and so on…
Of course, due to the collapse of UST, there was more negativity in the market, which scared off new and old investors to fund in cryptocurrencies or hold money, especially in stablecoins.
Since stablecoins have become an indispensable tool in the world of cryptocurrencies, they will continue to be used, and their developers and we can only learn from the negative experience of Terraform Labs.
It cannot be said that the collapse of UST was the cause of the bear market, as many factors contributed to this: the macroeconomic and political situation in the world, the withdrawal of funds to fiat by large players, the increase in the Fed rate, and so on…
Of course, due to the collapse of UST, there was more negativity in the market, which scared off new and old investors to fund in cryptocurrencies or hold money, especially in stablecoins.
Since stablecoins have become an indispensable tool in the world of cryptocurrencies, they will continue to be used, and their developers and we can only learn from the negative experience of Terraform Labs.
BTC/USD chart (late spring/summer)