TerraUSD (UST) recently overtook Binance USD as the third-largest stablecoin in terms of market value.
The token’s overall market value is now $17.50 billion, slightly higher than BUSD’s $17.46 billion.
Actual trading in UST, on the other hand, appeared to be lagging behind its peers, with 24-hour volumes of $261 million. It is now the fifth most valuable stablecoin. The token’s volume was a fraction of what larger peers USDT and USDC saw. According to Coinmarketcap data, it even trailed lesser rivals BUSD and DAI.
The rising market valuation of UST appears to be more tied to its reserves and token circulation, based on the volumes. This is in direct contrast to the token’s genuine need. Through staking and deposits, the Anchor Protocol (ANC), Terra’s main DeFi platform, currently controls roughly two-thirds of UST supply.
Reason for Market Capital Rise
Terra community the Luna Foundation Guard (LFG) has been progressively growing the reserves which back UST. Burning LUNA tokens to mint UST is a significant part of this. Because UST is pegged to the dollar at a fixed 1:1 ratio, the issuance of extra tokens has no effect on its price.
It is desirable to mint fresh UST because it tends to raise the token’s market valuation. This is in contrast to the usual deflationary impact of new token creation.
According to Terra Analytics, the overall UST supply increased by around 800 million tokens in the last week. This amounts to a market capitalization increase of $800 million. Except for the release of 10 million tokens from non-circulating supply, LUNA’s burn rate remained constant during that time.
Far From Goal
The ambition of Terra founder Do Kwon to make UST the most extensively used stablecoin is still a long way off. The LFG’s constant efforts to strengthen their reserves have put some downward pressure on LUNA, which fell 14% last week.
The cryptocurrency hit a one-month low this week after the circulating quantity of 10 million tokens was released, causing a price shock. It was selling near $81.34, a one-month low. This week, it is now one of the worst-performing cryptocurrencies.
There have also been concerns about ANC’s long-term viability. This is especially true given the protocol’s market-beating 20% yield. A spike in deposits has put a strain on the company’s reserves. This might cause a significant liquidity crunch, perhaps weakening the UST peg.
However, the ANC has taken steps to prevent this from happening, most notably voting in support of dynamic yields. To increase its liquidity, the protocol has extended compatibility for other blockchains.
