LUNA/UST fiasco causes divergences in BTC stablecoin trading pairs on global cryptocurrency exchanges.
Cryptocurrency markets continue to suffer severe losses following the depegging of the Terra ecosystem stablecoin TerraUSD (UST), causing discrepancies between the stablecoin pegs and the value of Bitcoin (BTC).
Stablecoin Tether (USDT) showed signs of stress as the USDT/USD pair traded below $0.99 on major exchanges. Tether and Bitfinex CTO Paulo Ardoino tweeted to USDT holders that over the past 24 hours, more than 300 million UDST tokens have been redeemed with their $1 bond.
Cointelegraph reached out to Ardoino to see if there is any concern about USDT’s ability to maintain its $1 peg given recent events. Ardoino stressed that USDT has maintained its stability thanks to numerous black swan events and highly volatile market conditions and has never backed out from a buyback:
“Tether continues to process redemptions normally amid expected market panic after yesterday’s market. Despite this, Tether has not and will not refuse any of its customers a ransom, which has always been its practice.”
With Fear, Uncertainty, and Doubt (FUD) at levels reminiscent of the 2018 Bitcoin market crash, Ardoino offered perspective given the technical differences between USDT and algorithmic stablecoins:
“Unlike these algorithmic stablecoins, Tether has a strong, conservative, and liquid portfolio of cash and cash equivalents such as short-term Treasury bills, money market funds, and commercial paper from issuers rated A-2 and above.”
The current situation with Terra (LUNA)/UST could undermine confidence in the ability of stablecoins and related platforms to buy back token swaps for their $1 peg. Despite this, Ardoino believes that stablecoins will remain an important cog in the cryptocurrency space. “I don’t think users of centralized stablecoins have ever lost confidence,” he said, adding, “There will always be a market for stablecoins as they offer traders an opportunity to interact with the larger crypto ecosystem.”
USDT/USD pair. Source: Trade View
The price of BTC/USDT has also been out of whack compared to other popular stablecoins, with the difference in value compared to other stablecoin trading pairs ranging from $500 to $1,000 on different exchanges.
Related: Bitcoin falls below $27,000 by December 2020 as Tether’s stablecoin peg falls below 99 cents
The collapse of LUNA and its algorithmic stablecoin UST shook markets. The relationship between them was quite simple: users could exchange 1 LUNA for 1 UST or vice versa.
The system collapsed when the price of UST fell below its $1 peg, leading to a large amount of arbitrage trades where traders burned UST for 1 LUNA, which was then sold at a profit. However, continued selling of LUNA caused its value to fall, which not only eliminated arbitrage opportunities but also increased the number of LUNAs in circulation while the price continued to fall.
The rest is history as Terra co-founder Do Kwon tries to fix a grim situation. Investor sentiment has been hit hard and the Bitcoin Fear and Greed Index is in the extreme fear zone.
Stablecoins have long been a source of stability for crypto markets around the world, but the bumpy ride of 2022 coupled with the LUNA/UST fiasco had repercussions for other prominent US dollar-pegged coins.