Will Terra UST Keep its 1:1 Peg With the USD?

Earlier this year, Terra UST once again gained massive interest from investors. Terra Labs’ Anchor Protocol attracted investors via the high staking yield in its ecosystem. The platform offered a 19.5% annual percentage yield to yield farmers, making it one of the highest yield returns for stablecoins in the crypto ecosystem.

The massive returns offered by the platform have made more users trade with Terra’s stable token, which is now the biggest algorithmic stablecoin and the third-largest stablecoin in the market cap ranks.

Can Terra Keep the 1:1 Peg with the US Dollar?

Terra maintains its absolute value through its demand and supply rotation mechanism with Luna. The protocols’ liquidity pools have to ensure a 50/50 balance for the price of UST to maintain its $1 value.

When there is an imbalance in the value of UST to the USD, Luna tokens are either burnt or minted for price regulation.

Burning of Luna tokens occurs when UST goes above the $1 mark, while minting of new tokens occurs when UST goes below the $1 mark. In May 2021, Terra UST experienced its largest price instability when the stablecoin traded at $0.96. More Luna tokens had to be minted to balance its value, which significantly led to LUNA’s price crash.

More recently, the Terra ecosystem again experienced price instability which was assumed to be a coordinated attack on the protocol. The price instability inevitably led to an intense price crash of the token.

Many Reddit users interested in the Terra ecosystem have expressed their concerns about Luna maintaining its peg due to the recent instability and further black swan events that may happen in the future.

As it stands, the protocol’s mechanism for maintaining price stability is far from perfect, and extreme price volatility will continue to affect the UST more than it does other stablecoins. So far the token’s value never gets to zero, UST will still function as a stablecoin in the crypto ecosystem. Arbitrage traders will always be handy to balance demand with supply.

Terra’s UST currently has a value of $0.995, which is still acceptable, and a market capitalization of $18.6 million.