Price of algorithmic stablecoin UST drops 2% below dollar peg

The algorithmic stablecoin UST briefly fell 2% below its peg to the US dollar on Monday, according to data from crypto exchange Binance — the fourth significant drop below its peg in the last two days.

UST is a stablecoin backed through its relationship with the LUNA token. A burning mechanism and the ability to always be able to sell $1 worth of LUNA for 1 UST are designed to keep it in check. Yet critics say the success of this operation depends on the strength of LUNA's price and on its key DeFi platform, Anchor, continuing to produce an up to 20% yield to incentivize liquidity — something that's on track to run out soon barring any fixes.

Evidence for traders selling UST can be seen in the Wormhole bridge, a platform designed to exchange assets across blockchains. The pool of stablecoins within the protocol was previously made up of 50% UST, with the remainder in various other stablecoins. UST now comprises 78% of the pool, implying that traders have been selling it for other stablecoins.

In light of such concerns, the Terra ecosystem has been stockpiling bitcoin to use as a backstop. On the back of the initial de-pegging from the dollar, Terra has said it will lend out $750 million of bitcoin to market making firms to buy UST and help return the peg to its $1 mark.

Yet there appears to be strong downwards pressure on the peg. After falling to $0.98 initially, the price of UST rose as high as $0.986 — before falling back down again.

As for the price of LUNA, it has fallen 14% today to $55 among a general crypto market downturn. It is now down 54% from its all-time high of $118 in April.