Against the backdrop of a decline in deposit yields over just under two days, more than 2.2 billion UST were withdrawn from the Anchor protocol. As a result, the Terra ecosystem’s algorithmic stablecoin briefly lost its peg to the US dollar.
At one point on May 8, the asset traded near $0.98, according to CoinGecko.
In March, the Anchor community voted for a proposal under which the deposit rate can change by up to 1.5% depending on the size of the yield reserve.
According to SmartStake, over the last month the project’s reserves declined by almost 44%, to 180.45 million UST.
Earlier, similar incidents had occurred with Anchor — in February 2022 the protocol’s reserve was nearly exhausted. To avert a collapse, the non-profit Luna Foundation Guard (LFG) transferred 450 million UST to the project.
However this time there were no capital injections. In early May, the deposit rate at Anchor was reduced for the first time to 18%. Its current level is even lower — 17.87%.
As a result, users began to withdraw assets en masse from the protocol. On May 7, Anchor’s deposits exceeded 14 billion UST — at the time of writing the figure stood at 11.77 billion UST (-16%).
The Curve Finance team also confirmed that on May 7 “someone started selling en masse” UST, causing the stablecoin to briefly lose its peg to the US dollar. The developers noted that these actions “faced strong resistance” in the form of counter-sales of ETH and stETH.
News of Curve Wars 🌈⚔️
Yesterday, someone started selling UST en masse, so it started to depeg. However, that was met with a great resistance, so the peg was restored. To get enough USD for that, a lot of ETH and stETH were sold also.
Aftermath? High Curve trading vol (>uni3) pic.twitter.com/ZChdZiVzcK
— Curve Finance (@CurveFinance) May 8, 2022
For example, Tron founder Justin Sun said he was buying UST, calling the move his \”secret plan\”. According to Etherscan, he purchased about 1 million UST, using USD Coin (USDC) for the purchase.
Earlier in the Tron network the launch of the algorithmic stablecoin USDD, whose collateral model is similar to that used in the Terra ecosystem, took place.
The stability mechanism of UST largely relies on arbitrageurs, so the decline in Anchor’s yield negatively affected their motivation to maintain parity of the stablecoin with the U.S. dollar.
In March 2022, LFG founded a reserve Bitcoin fund, which should promptly provide liquidity needed to maintain a stable price for UST in BTC. In May the assets under its management reached 80 394 BTC.
Some argued that the loss of UST’s peg could lead to the liquidation of part of the fund’s assets. For example, this was stated by Thanefield Capital’s head of trading under the alias resonancethis.
If Jump doesn’t defend this soon then there’s going to be an incoming $3.5B market sell for BTC
FWIW I think the buy execution on that $3.5B was poor — insiders frontrunning/public knowledge etc
The reverse flow could therefore have a disproportionate impact
— Resonance (@resonancethis) May 7, 2022
The head of security for the Polygon project, Mudit Gupta, noted that the UST incident was accompanied by a number of suspicious operations.
According to him, on May 7 Terraform Labs removed 150 million UST liquidity from Curve, after which an unknown newly created address transferred over 84 million UST to the Ethereum network. A few minutes later ETH were dumped, which caused the sell-off, Gupta said.
Soon after that the company withdrew an additional 100 million UST from Curve.
As the stablecoin’s price began to fall, an unknown market participant began selling ETH and buying UST. The latter traded below the peg, allowing a profit.
— Terraform Labs removed another $100m of UST liquidity from Curve soon after
— As UST started to depeg, an unknown actor started dumping ETH and buying UST ($100m+)
— As UST was trading below peg, they made a profit all while avoiding bad optics around dumping Ether— Mudit Gupta (@Mudit__Gupta) May 8, 2022
The founder of Terraform Labs, Do Kwon, explained that the company withdrew 150 million UST from Curve to prepare for the launch of the 4pool, scheduled for next week. After that, it withdrew another 100 million UST to \”reduce the imbalance\”.
Kwon emphasised that Terraform Labs has nothing to do with the 84 million UST operation. He also added that the company has no incentive to depeg the stablecoin from the US dollar.
And not sure what possible profit would have been gained even if we tried — 50bp spread on UST while luna giganuked?
— Do Kwon 🌕 (@stablekwon) May 8, 2022
ForkLog wrote in a recent exclusive piece about how Anchor problems could affect the Terra economy:
Tether’s chief technology officer Paolo Ardoino warned that algorithmic stablecoins with high capitalization are dangerous for the market.
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