Binance announced that withdrawals for Terra’s LUNA and UST tokens had been “temporarily suspended” today.
The firm halted withdrawals “due to a high volume of pending withdrawal transactions,” adding that it would restart withdrawals once it deemed “the network to be stable and the volume of pending withdrawals” had reduced.
Binance’s actions come amid an incredibly volatile period for LUNA and UST.
LUNA, the native token underpinning the Terra blockchain, shed 51.9% of its value in the past 24 hours and is currently trading at $29.53, according to data from CoinMarketCap.
The native token wiped out nearly $11 billion of investors’ wealth over the last 24 hours. The coin is down 75% from its all-time high of $119.18 recorded in April 2022.
The bearish price action, though seen across the entire crypto market, is especially dreary due to Terra’s native stablecoin, UST, also losing its dollar peg.
The stablecoin currently trades at $0.90 well below its dollar peg. It recovered from an all-time low of $0.6841, recorded earlier today.
And due to how closely UST and LUNA are interconnected, the stablecoin losing its peg has had serious knock-on effects.
UST adds fuel to LUNA crash
UST is a decentralized algorithmic stablecoin, which means it doesn’t have a dollar (or other traditional assets) backing it like Tether’s USDT or Circle’s USDC.
Instead, its peg is governed by smart contracts, specifically a mint-and-burn mechanism between LUNA and UST.
Here’s how it works.
Investors can always swap one UST for $1 of LUNA, and vice versa. Each time this swap is made, the UST traded for LUNA is destroyed and removed from circulation. Conversely, whenever LUNA is traded for UST, that LUNA is destroyed.
This creates an attractive arbitrage opportunity for savvy speculators. That’s because each time UST falls below its dollar peg, there’s an opportunity to buy that discounted stablecoin and then swap (and destroy it) for the $1 in LUNA. In this way, an investor can turn a neat profit, while also removing UST from circulation and adding buy pressure to the stablecoin.
These two market forces work to bring the peg back to dollar parity. And, as mentioned, the opposite is also true.
Users can swap LUNA worth $1 for a UST that’s worth more than a dollar in the open market and pocket the difference. Since the newly-minted UST is being sold on the market, it adds sell pressure to the stablecoin and pushes it back down to its peg.
This week, as the stablecoin lost its peg rapidly, people have been incentivized to swap their UST for LUNA at a dollar and pocket the profit by selling LUNA on the open market.
This has created enormous sell pressure for LUNA in the market, which has played a key role in the latest sell-off.
Sell pressure like this, panic around UST losing its dollar peg, and Binance also halting UST and LUNA markets have been key drivers behind LUNA’s latest bearish action.
The views and opinions expressed by the author are for informational purposes only and do not constitute financial, investment, or other advice.
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