Market Insider | Weilun Soon | May 10, 2022
Terra Network’s luna token plunged by as much as 61% on Tuesday, after sister stablecoin TerraUSD lost its peg to the dollar for the second time in as many days.
TerraUSD is an algorithmic stablecoin whose value is fixed to $1. Unlike traditional stablecoins that are backed up by fiat currency and hard assets — including government bonds or even gold — UST, as it’s known, has its value set by a computer algorithm. But intense volatility across the broader financial markets on Monday, caused by investors fretting about the outlook for surging interest rates and inflation, hit the crypto market. UST decoupled from the dollar again, leaving the luna token in freefall on Tuesday.
See: Terra is transitioning from a dollar-pegged stablecoin to a bitcoin-backed stablecoin
Last week, LFG announced it had bought $1.5 billion worth of bitcoin to add to its reserves. It has said in the past it intends to acquire $10 billion in bitcoin for its reserves.
Terra Labs’ co-founder and CEO Do Kwon said:
“Per the LFG’s mandate, the LFG will proactively defend the stability of the $UST peg & broader Terra economy, especially under volatility and the uncertainty of macro conditions in legacy markets,” the group said.
“For the first time, you’re starting to see a pegged currency that is attempting to observe the bitcoin standard.”
See: How Stable is your Stablecoin?
LFG said in a tweet Monday that it would lend bitcoin to trading firms. “Deploying more capital steady lads,” Do Kwon tweeted after.
Deploying more capital – steady lads
— Do Kwon 🌕 (@stablekwon) May 9, 2022
However, algorithmic stablecoins are controversial even within the crypto community. “It’s a lot more dangerous than taking a T-bill and tokenizing it,” Charles Cascarilla, chief executive of Paxos, told the Wall Street Journal last month. Paxos issues Binance USD, a stablecoin that’s backed by monetary assets.
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BNN Bloomberg | | May 11, 2022
Luna Bailout Terms Put a Crypto Spin on Death-Spiral Financing
(Bloomberg) — From borrowing and lending platforms to synthentic equities to simply trying to build a stable proxy for the US dollar, cryptocurrency projects have long attempted to reimagine traditional financial vehicles for the age of the blockchain.
Now, after the values of both the Luna and TerraUSD coins have collapsed in dramatic fashion, something that in broad strokes resembles an old Wall Street tactic is being revived in hopes of saving the project behind them — death-spiral financing — as well as another money-raising tool favored by strapped companies, a PIPE, where stock is sold to institutions at below-market prices.
In the latest example of the crypto world imitating traditional finance, backers of the TerraUSD algorithmic stablecoin (known as UST) are trying to raise about $1.5 billion to shore up the token after it crashed from its dollar peg, according to the founder of a firm that was approached about the deal from the Luna Foundation Guard, a consortium set up to help UST maintain a $1 value. Investors would be able to buy the Luna cryptocurrency — a coin with fluctuating value that’s used on the other side of arbitrage trades meant to keep UST pegged at $1 — at a 50% discount to the spot price. The LFG didn’t immediately respond to requests for comment.
To Max Gokhman, chief investment officer for AlphaTrAI:
Selling something that’s crashed so hard at a 50% discount is like a bad joke. There’s catching falling knives and then there’s standing outside when it’s raining chainsaws. This feels like the latter. “Risky assets are correlated and the selling pressure drags one asset into a deeper discount,” said Wilfred Daye, chief executive officer of Securitize Capital, a digital asset management firm. “The selling pressure drags the price further down on BTC, and then you have a whole loop, if you will. That’s the death spiral. It’s crazy.”
In order for Terra to issue enough Luna to get UST back up to $1, dilution of as much as 1,000% may be needed, according to Kunal Goel, an analyst at crypto-research firm Messari. The resulting mismatch between demand for Luna and supply of UST from investors fleeing Terra’s borrowing and lending protocol Anchor may prove to be fatal.
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