Pedestrians pass by an exhibition of cryptocurrency bitcoin on February 15, 2022 in Hong Kong, China.

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A multibillion-dollar bet that bitcoin could act as a “reserve currency” for the crypto economy is already being tested as the UST, a controversial stable coin, struggles to maintain its fixed value of $ 1.

The UST fell close to 99 cents over the weekend, fueling fears of potential “banking” that could force Terra, the project behind it, to dive into a $ 3.5 billion bitcoin pile to sustain the token.

Now, the Luna Foundation Guard, an organization founded by inventor Terra Do Kuon, says it will allocate $ 750 million in bitcoins to commercial companies to keep the UST fixed price. But this has not been done to allay investors’ concerns about the implications for bitcoin.

What is UST?

Terra protocols also include arbitration mechanism, where investors can use deviating prices in each of the tokens. For example, too much demand for UST can lead to a price increase of $ 1. This means that traders can convert a $ 1 moon into UST and collect the difference as a profit.

The model is designed to match supply and demand for UST. When the price of UST is too high, consumers are encouraged to burn the moon and create a new UST, increasing the supply of stablecoin while reducing the amount of luna in circulation.

“The moon is becoming scarcer, which makes it more valuable, transferring that value to the UST,” says Alexander.

When the price of UST is too low, the opposite happens – UST burns and the moon is cut. This should, in theory, help stabilize prices.

The problem

“This implies normal market conditions,” said David Moreno Darokas, a research analyst at CryptoCompare.

“During periods of high volatility and unilateral buying / selling activity for the UST, the above stabilizer may not be sufficient to maintain the fixation in the short term.”

There have been numerous cases in which the UST has broken away from its $ 1 commitment, raising concerns about the viability of its economic model – especially in a situation where several people are trying to cash their tokens at once.

The last challenge arrived over the weekend. Hundreds of UST millions were sold to Anchor, Terra’s leading lending platform, as well as Curve and Binance, leading to allegations of a “coordinated attack” on Stablecoin.

“Men will literally fail to attack Stablecoin instead of going to therapy,” said Do Kuon, a South Korean crypto-entrepreneur who co-founded Terraform Labs, in a deleted tweet.

“Reserve currency”

What does this mean for bitcoin