Tuesday, the global cryptocurrency market Binance stated that withdrawals for LUNA and UST tokens had been halted amid the volatility of the market. UST, a so-called algorithmic stablecoin, had a quick decoupling from its dollar price peg, dropping to as low as $0.62 on Binance due to the market sell-off.
Binance Pauses Withdrawals of LUNA and UST
Binance said early Tuesday morning that it has suspended UST and LUNA withdrawals for around six hours due to many outstanding withdrawal transactions and the network congestion and slowness.
Withdrawals on Terra Network $LUNA temporarily suspended.https://t.co/hIGrAEzOwD
— Binance (@binance) May 10, 2022
The exchange suggested that withdrawals for the two tokens would resume after it determined that the network was stable and the number of withdrawal requests had dropped.
Binance’s suspension of UST responds to the extraordinary stablecoin meltdown that has shaken the crypto market over the last few days. Currently, UST trades at $0.9093, well below the anticipated $1 mark.
Given how intimately UST and LUNA are connected with the on-chain mint and burn process, it is unsurprising that the stablecoin’s dollar peg loss has resulted in disastrous ripple effects.
UST Losing Dollar Peg Exacerbates LUNA’s Decline
TerraUSD (UST) is the premier algorithmic stablecoin working with LUNA and Terra’s dual token mechanism to maintain a $1 price.
Terra holders burn $1 worth of LUNA to produce 1 UST when UST’s price exceeds its dollar peg. Likewise, if the price of UST falls below $1, investors can burn it to have $1 worth of LUNA. This assures that savvy traders benefit from arbitrage while simultaneously depleting UST and increasing demand for the decentralised stablecoin.
However, Terra had undergone a crisis in recent days as the UST had frequently lost its dollar peg, even when the Luna Foundation Guard (LFG) purchased billions of dollars worth of bitcoin (BTC) as the stablecoin’s reserve fund. LFG also recently lent out $1.5 billion of its BTC reserves to keep UST’s dollar peg, but this did nothing to calm the Terra ecosystem’s turmoil.
After the de-pegging, most investors hurried to exchange UST for LUNA and sell it on the open market. This caused LUNA’s market cap to fall below that of UST, further endangering the stability mechanism of the stablecoin.
Significant selling pressure, the fall of the UST, and Binance’s decision to restrict withdrawals are likely the primary reasons for LUNA’s painfully gloomy prospects. In approximately the last 48 hours, the non-stablecoin asset has lost over 65 % of its value and is now worth $29.91. It is currently ranked fourteenth in terms of the market cap.
