Bitcoin investors are in a state of panic as the controversial terraUSD stablecoin slips beyond the projected $ 1 fix.

TerraUSD, or UST, fell below 70 cents for the first time late Monday as holders continued to run away from the token in what some described as a “bank run.” The token fell just 62 cents before rebounding to trade at 90 cents on Tuesday, according to Coinbase.

Created by the Singapore-based Terraform Labs in 2018, the UST is what is known as an “algorithmic” stable coin. Part of the Terra blockchain project, it aims to track the value of the dollar, like other stablecoins tether and USDC.

However, unlike these cryptocurrencies, Terra has no cash and other assets held in reserve to support its token. Instead, he uses a complex combination of code – along with a sister token called luna – to stabilize prices.

UST is important to bitcoin investors because the Luna Foundation Guard, an organization that supports the Terra project, has billions of dollars in bitcoins that could potentially be thrown into the market at any time.

Every professional cryptocurrency investor has an eye on the UST today, watching to see if it can maintain its commitment to the dollar, “said Matt Hugan, chief investment officer at Bitwise Asset Management.” There is clearly significant market risk.

Simply put, the Terra protocol destroys and creates new UST and luna units to adjust supplies. When the price of the UST falls below the dollar, it can be taken out of circulation and replaced by the moon, which makes the supply of the UST more scarce and increases its price – at least that’s how it should work in theory.

To complicate matters further, Terra creator Do Kuon bought $ 3.5 billion worth of bitcoins to provide support for the UST during the crisis. The theory was that UST could eventually be redeemed for bitcoin instead of the moon, but this has not been tested and has not yet been put into practice.

Deposits at Anchor, Terra’s flagship lending protocol, fell from 10.3 billion tokens on May 6 to just 6.4 billion on Tuesday, according to data from the Nansen blockchain analysis platform. Anchor offers consumers almost 20% annual percentage return on their UST holdings, a rate that many analysts find unsustainable.

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On Monday, security at the Luna Foundation’s Kwon Foundation said it would provide $ 750 million bitcoins to commercial companies to “help protect UST binding”, while another 750 million UST will be allocated to purchase more bitcoins, “as market conditions return to normal”.

In a subsequent tweet, the organization said it had withdrawn 37,000 bitcoins – worth more than $ 1 billion in current prices – for lending. “Very few” of the borrowed bitcoins have been spent, the Luna Foundation Guard said, but is currently being used to buy UST.

Several crypto investors are worried that Luna Foundation Guard may have sold or will sell much of its bitcoins to support UST – analysts said the group’s bitcoin portfolio is already completely empty.

Against the background of all this uncertainty, the decline of the UST sent shockwaves across the crypto market.

Bitcoin, the world’s largest digital currency, briefly fell below $ 30,000, reaching its lowest price since July 2021. At 7:00 a.m., ET bitcoin was trading at $ 31,324, down about 5% in the last 24 hours. It has now fallen by more than 50% from its highest level in November.

Luna, a colleague of UST, has shrunk by about half in the last 24 hours. It was last traded at $ 32.

In addition to the plight of UST holders, Binance, the largest crypto exchange in terms of market volume, temporarily suspended withdrawals on both the UST and luna “due to a large volume of pending withdrawal transactions”, citing network congestion.

Since then, Binance has resumed withdrawals and says it will “continue to monitor” network conditions.

“I think the market expects some forced sales here from Terra and the reserve,” Nick Carter, co-founder of Coin Metrics, told CNBC. “It’s a disaster, but it’s very expected. No algorithmic stablecoin has ever succeeded, and this is no exception.

He added that the problem with the UST is that it is largely “supported by faith”.

“This is not fully guaranteed, it is certainly not fully supported by reserves,” he told CNBC. “It really was just backed up by effective faith in the issuer.”

Terraform Labs did not respond to numerous requests for comment.

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