What happened to Luna Foundation Guard’s much anticipated stablecoin $UST?
This is what hyperinflation looks like.
The total supply of $LUNA went from about 345 million tokens on May 10 to about 6.5 trillion only 6 days later. As a result — the price of poster child algorithmic stabelcoin ($LUNA) shed 99.9% of its value.
Why did this happen?
$UST maintains its peg through a price burn mechanism supported by $LUNA:
If $UST > $1 then $1 of $LUNA is redeemed for ‘more’ $UST
If $UST < $1 then $1 of $UST is redeemed for ‘more’ $LUNA
This means; at LUNA’s current price of $0.000215, swapping $1 UST gets you 4651.163 LUNA. So if someone were to swap a large amount, say 100,000 UST, that would lead to the minting of 465 million LUNA. Ouch.
In late March of this year Terraform Labs (the company behind Terra) laid out a plan to buy $10 billion worth of Bitcoin (and other crypto assets) through the Luna Foundation Guard (LFG) in order to backstop $UST in the event of a crisis. One significant problem remained; UST is not fully collateralised. This in stark contrast to the world’s other top 5 stablecoins.
Before the collapse the market cap of $UST was around $18 billion — a value far greater than the mere $4 billion LFG had in reserves. The rest is history.
