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DeFi

What are the side effects of UST losing its peg?

11 May 2022 : 09:12
3 min read

As TerraUSD (UST) has lost its dollar peg, the issue of the implications on the larger crypto market remains. Here are a few examples of how UST adoption might have a far more significant impact than planned.

Startups integrated UST into their products

One of the significant risks is the widespread adoption of the Anchor Protocol, which was launched in 2020 to allow for $UST savings, lending, and borrowing. The protocol piqued the interest of not just retail investors but also crypto start-ups. With a 20% APY, it drew significant investor interest, reaching an all-time high in Total value locked (TVL) of $17 billion.

Given the current state of the $UST, it will be clear soon which companies used Anchor Protocol in their back-end. Stablegains, for example, raised $3 million in April from Y Combinator, SN Ventures, and Moonfire, among others. According to its documentation, the startup moves customer funds into the Anchor protocol to generate yield.

This event demonstrates how DeFi Legos, a concept used to describe the possibilities of integrating DeFi protocols, may have a significant damaging effect if one of the building blocks is broken. Something that might influence Venture Capital’s perspective about investing in apps that integrate stablecoins.

Hedge funds and projects that hold UST

Given the widespread adoption of UST by the crypto industry, there is a good chance that many investment firms and crypto projects held some of their treasury in the stablecoin. It is unclear how much exposure to the stablecoin there was, but this could also impact funds that may be forced to sell other assets, and projects may lose some of their treasury.

The Arrington Anchor Yield Fund, which launched on November 4, 2021, is an extreme example. The fund, which had a cap of $100 million for qualified investors, essentially invested investor funds in Anchor Protocol. With examples of this being made public, it is unclear how much exposure funds have to both $LUNA and $UST.

The current market situation

UST has entirely lost its peg. It is now down to $0.39, which means that stablecoin holders have lost around two-thirds of their worth. While the stablecoin has recovered at several moments and its decline, it is presently at its lowest point. As stated in the article, there are several side effects of this, and these are only two instances; there are sure to be many more.

The price of Luna has dropped to $5.40 at the time of writing, representing an 85%  drop in the previous 24 hours. It has now dropped from a high of $116 in April.


About Author

Stan Colenbrander

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Stan is the head of news and podcast host at Cryptonary. He was formerly a member of the Cryptonary Pro community. In early 2021, he decided to drop out of journalism school at university to pursue journalism in real life and make an impact in the crypto space. . His areas of interest include the NFT industry, decentralised finance, and crypto start-ups.

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