It all comes down to supply and demand: Through lending application Anchor Protocol, which held most of TerraUST’s (UST-USD) circulating coin supply in the beginning of May, offered investors staking rewards of 20% “backed by a token [LUNA] whose value is driven only by demand from new investors in the token,” Ackman explained. “There is no fundamental underlying business,” he added.
Ultimately, LUNA (LUNA-USD) started to collapse on May 9, as “the supply of sellers of Luna overwhelmed the buyers,” Ackman said in a follow-up tweet. On that same day, UST also became unpegged, though fiat-backed stablecoins like Tether (USDT-USD), the largest stablecoin by market cap, remained resilient, holding its $1 peg.
As a result of Terra’s failure as well as subsequent de-peggings from other algorithmic stablecoins, “the crypto industry should self-regulate away other crypto projects with no underlying business models before crippling regulation shuts down the good and the bad,” Ackman said.
Moreover, “we expect stablecoin regulation to lead to enhanced disclosures for algorithmic stablecoins that are undercollateralized like UST, but an outright ban seems unlikely, given comments by regulators that indicate a focus on reserve transparency and the systemic risks of fiat-backed stablecoins for traditional financial markets,” Bank of America analyst Alkesh Shah wrote in a note.