Luna Foundation Guard (LFG)’s proposed cryptocurrency reserve to guard against a collapse of the UST stablecoin came too late to guard against the past week’s market turmoil.
As digital assets plunged along with traditional markets, the lack of an established formal structure in place for the project’s forex reserve – designed to head off a crisis of confidence in UST’s dollar peg – left the stablecoin vulnerable to a market rout.
Instead, officials found themselves scrambling to improvise solutions, offering some $1.5 billion of cryptocurrency loans to maintain the peg and later reportedly scrambling to line up fresh capital to back the project. (A spokesperson for the project didn’t immediately respond to a request for comment.)
LFG accumulated more than $3 billions in its reserve, mostly in bitcoin, before UST first lost its peg on Sunday. However, the plan to connect the reserve to the blockchain with a smart contract to stabilize UST in a crisis was still weeks away from launching.
As of late Tuesday, UST was changing hands below 80 cents.
“The reserves had reached its desired size, but the infrastructure to utilize the reserves was not in place,” Vetle Lunde, analyst at the Norway-based crypto research firm Arcane Research said. “Add a bleeding market and poor weekend liquidity to the mix, and you’ve got yourself a great opportunity to attack.”
UST is the largest algorithmic stablecoin, with a market capitalization that topped $18 billion before losing its peg to the dollar during the weekend, falling to as low as $0.68 on Monday, and its implosion sent shockwaves through the crypto market.