UST stablecoin briefly lost its peg to the US dollar amid the outflow of assets from Anchor

Against the background of a decrease in the rate of return on deposits, over 2.2 billion UST were withdrawn from the Anchor protocol in less than two days. Due to the incident, the algorithmic stablecoin of the Terra ecosystem briefly lost its binding to the US dollar.

At the moment of May 8, the asset was trading near $0.98, according to CoinGecko.

Half-hour chart of UST/USD. Data: CoinGecko.
In March, the Anchor community voted for a proposal according to which the deposit rate can change by a maximum of 1.5%, depending on the volume of the yield reserve.

According to SmartStake, over the past month, the volume of project reserves has decreased by almost 44%, to 180,45 UST.

Data: SmartStake.
Similar incidents have already happened with Anchor before — in February 2022, the protocol reserve was almost completely depleted. To prevent the collapse, the non-profit organization Luna Foundation Guard (LFG) donated 450 million UST to the project.

However, this time there was no capital injection. In early May, the interest rate on deposits in Anchor was reduced to 18% for the first time. Now its value is even lower — 17.87%.

Because of this, users began to massively withdraw assets from the protocol. On May 7, the volume of Anchor deposits exceeded 14 billion UST — at the time of writing, the figure is 11.77 billion UST (-16%).

The team of the decentralized Curve Finance exchange also confirmed that on May 7, "someone massively started selling" UST, which caused the stablecoin to briefly lose its peg to the US dollar. The developers noted that these actions "faced a lot of resistance" in the form of counter sales of ETH and stETH.

For example, the acquisition of UST was announced by Tron founder Justin Sun, who called the move his "secret plan". According to Etherscan, he acquired about 1 million UST using USD Coin (USDC) to buy.

Earlier, the USDD algorithmic stablecoin was launched on the Tron network, the security model of which is similar to that used in the Terra ecosystem.

UST's stability mechanism relies heavily on arbitrageurs, so the decline in Anchor's profitability negatively affected the motivation of the latter to maintain the parity of the stablecoin with the US dollar.

In March 2022, LFG established a reserve bitcoin fund, which should promptly provide the liquidity in BTC necessary to maintain a stable UST price. In May, the volume of assets under his management reached 80,394 BTC.

Some felt that the loss of UST pegging to the US dollar could lead to the liquidation of part of the fund's assets. For example, this was announced by the head of the trading company Thanefield Capital under the nickname resonancethis.

In the comments, users noted that the LFG fund does not sell assets automatically, so you should not expect avalanche-like market sales of bitcoin.

Recall that the technical director of Tether Paolo Ardoino warned that algorithmic stablecoins with high capitalization are dangerous for the market.