The stable coin Terra USD dropped in value as the cryptocurrency seemed to have unpegged from the United States dollar for a brief period. The increased volatility became obvious with the coin losing grips with its USD peg on May 7, at 6.40 pm as seen from charts from Coinmarketcap.

Terra USD has traded below the one dollar mark, raising concerns that further breakdown is inevitable. But the stablecoin recovered from the brief unpeg. Moreover, a clearer view is available on the 3-month chart, which is an indication that this event, like all stablecoins is nothing new.

Concerns About The Algorithmic Stablecoin

Market watchers have raised concerns regarding the potential risks associated with the algorithmic stablecoin, UST, which was not backed by any assets. The stablecoin maker, Terraform Labs reduced their involvement with UST, raising even more issues that its stability might be threatened.

With its $18.6 billion market capitalization, Terra USD is the biggest algorthmic stablecoin in the market. This did not minified the apprehension that the unbacked stablecoin would cave in as it just did.

Reacting to the unpegging, a Twitter user, BTCMaxxx said that the unpegging of the Terra USD is not surprising, considering that the creator, Terraform Labs “printed literal fugazi money” and bought up real assets.

Complex Algorithmic Mechanism

Terra USD, being an algorithmic stablecoin was designed to operate based on the stability of the USD. Unlike other prominent stablecoins such as the USDT and USDC, the makers of Terra USD has not backed it with real assets. Instead of being backed by real assets, the Terra USD (UST) operates based on a governance system that encourages the staking and burning of LUNA on the Terra platform. The complex mechanism of burning and redemption of the LUNA based on the algorithm was presumed to keep the value of the UST pegged at $1.

Looks like it gained it’s peg back… That spaz out over it losing its peg was a little dramatic. pic.twitter.com/VXQPHaudE6

— Andrew M (@PorterMetzger) May 8, 2022

Reacting to the unpegging, the company released an update via Twitter implying that the unpegging was the result of FUD and maintained that the stablecoin is doing fine.

This is despite the fact that the charts show otherwise. At the time of reporting, UST has seen volatility that caused the stablecoin to drop to $0.9913. Since the unpegging, it has not made the $1 mark.
Nevertheless, the platform could be right, considering that this is not the first time that the coin has depegged with a few cents. It could be how the mechanism was designed to work.