The structural risks of algorithmic stablecoins: UST de-pegging and contagion

UST’s dollar peg is being challenged, hitting lows of $0.6 on Tuesday, May 10th. This has caused contagion in the market as the Luna Foundation Guard actively uses its BTC reserves to save the peg. We explore the dynamics.
Source: Tradingview (FTX)

UST’s dollar peg is being challenged after hitting lows of $0.6 on Tuesday, May 10th.

The Luna Foundation Guard (LFG) finished building its $3bn treasuries last week, as we illustrate below in this article. Shortly thereafter, the $1 peg of UST was challenged over thin liquidity during the weekend.

The de-pegging originated from massive withdrawals from pool 53 in Anchor, leading UST to tumble towards $0.98, leading to a sell-off in bitcoin. The sell-off in bitcoin was caused by traders anticipating that LFG would be forced to liquidate its BTC reserves to maintain the peg. The turmoil temporarily settled over the weekend, and UST again approached its $1 peg, but not for long.

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