Terra was one of the promising projects until recently: its stablecoin ranked third in terms of capitalization with $18 billion in the rating of stable coins, in the DeFi sector it was second only to Ethereum, and the LUNA balancer coin was the only one of the TOP 10 to update the historical maximum in 2022.

The fall was so loud that it attracted the attention of US Treasury Secretary Janet Yellen.

Terra called its goal the creation of a bridge between traditional finance and cryptocurrencies. To do this, the project launched several stablecoins, including UST pegged to the US dollar. The algorithm of interaction between UST and LUNA, the internal coin of the floating exchange rate system, is responsible for the 1:1 correspondence of the exchange rate. Because of this, UST is called an algorithmic or decentralized stablecoin. We have repeatedly written about the advantages and disadvantages of this approach, including in the last article.

To strengthen the position of the stablecoin, in March Terra announced the future linking of UST to its own cryptocurrency reserves. After accumulating $3 billion, half of which was Bitcoin, the funds were transferred to market makers on May 09 to maintain the falling UST exchange rate.

The initial reasons for the decline in UST to 0.98 USD and below were the sale on the cryptocurrency market and the attack of an unknown seller who sold a $300 million stablecoin on May 08. This was accompanied by a discussion of UST’s weakness in social networks, which led to panic and significant pressure from other market participants. For some time, market makers tried to keep the UST rate at the expense of the implementation of Bitcoin and other crypto assets, but this did not save the situation.

At the moment, it is not known for certain whether Terra has lost all its reserves in an attempt to keep the UST rate, or has decided to stop its stabilization at the expense of the reserve. Since the reserves were out of the game, the main blow was taken by the LUNA balance coin, whose weekly drop reached 90%.

The profitability of UST staking reached up to 20%, which was reflected in the growth in the number of investors and the volume of blocked funds, despite the general decline of the cryptocurrency market in 2022. However, the fall in the UST exchange rate made further staking unprofitable, due to the flight of investors, the volume of blocked funds in DeFi tripled in a few days. At the moment, UST is trading at $0.82, which indicates the lack of normalization and the risks of further decline of LUNA.

Investor Lin Alden compared the linking of UST and Bitcoin with an attempt by developing countries to save the economy by burning gold and foreign exchange reserves, hinting at the logical outcome of such a step. And Janet Yellen on May 10 called on Congress to develop a bill on the regulation of stablecoins as soon as possible, citing UST as an example.

To even out the situation, the Terra foundation plans to attract an additional $1 billion in investments, and the project developer Do Kwon wrote on Tuesday that a recovery plan will be presented soon. However, the reputation has already been undermined, and the probability of restoring the project to historical indicators is estimated as extremely low.