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The idea behind UST was that if it falls below $1, you can redeem it for $1 of Luna instead. The idea being that UST is "backed" by the activity on the terra Bl
by shawabawa3 4y ago
The idea behind UST was that if it falls below $1, you can redeem it for $1 of Luna instead. The idea being that UST is "backed" by the activity on the terra Blockchain (fees are paid in Luna)
Of course, that means if UST is below $1 there is an arbitrage loop. buy UST at a discount, redeem it for Luna, sell Luna for USDC, repeat
This causes downward pressure on Luna's price. As Luna drops so does the faith in UST recovering, you end up with.... Luna dropping from $100 to $0.01, there's nothing backing UST effectively and it's still trading below peg (around $0.40)