# UST - not so Stablecoin By [rohan](https://paragraph.com/@rohan) · 2022-06-03 --- Introduction ------------ This May wasn’t specifically good for the **Web3.0** space. Market took a good hit, portfolios came down, people lost money. All this happened within a week. No - one before had imagined that a blockchain can be attacked and forced to be halted. Well that’s what happened to the **TERRA** network. Its native token LUNA lost 100% of its value. ![LUNA Market history over past month](https://storage.googleapis.com/papyrus_images/a8c90ecf855254be7a9f7b6ed91432cbb77a09509ff81e28e6222e737ed8fc52.png) LUNA Market history over past month Stable Coins ------------ There are two types of currencies in blockchain, one that you want to increase in prices i.e. the native tokens so that you can gain high ROI’s e.g. Ether, BTC etc. Other one is stablecoins, you want these to stay near 1$ i.e. their initial pegging. They are programmed in such a way that they stay low. They are considered the safe channel if you want to go long on your assets. For a better understanding, you can relate them with government securities in terms of traditional trading, they don’t offer high ROI’s but profits are guaranteed even if they are low. There are many such tokens as Tether’s USDT, or US Center government’s USDC. UST - LUNA ---------- Like USDT, USDC, **TERRA** network has its own stablecoin UST. Now unlike other stablecoins, which are backed up by liquidity in form of real money in the banks, UST is an algorithmically stable coin. Do Kwon, founder of the Terra network, designed this token. As per the theory, UST is 1:1 pegged to Terra’s LUNA. It means UST holders can swap 1 UST for 1$ LUNA by burning the UST and minting LUNA. Attack Phase - 1 ---------------- UST doesn’t have any other utility other than Terra’s most popular [Anchor Protocol](https://www.anchorprotocol.com/#). Anchor offers 20% yield for deposits, this is far more than any other protocol. But this deal is only effective to the UST, no other stablecoins, be it USDC, USDT. As per April end, 72% of all the UST was locked into Anchor, estimated around 14 billion dollars. Imagine a bank offering 20% interest on your deposits, obviously everyone would go to that bank and earn that pretty money. That’s what happened with Anchor, as the time passed, the number of lenders increased, but the number of borrowers kept decreasing, in this case a proposal was drawn and it was clear that those pretty 20% interest rates were not going to stand. After hearing the news, people started pulling their locked UST out from Anchor. Since there is no other use of UST, people started getting out of the Terra network [Anchor Docs](https://docs.anchorprotocol.com/) Attack Phase - 2 ---------------- Now to exit UST, there are two options, one - the inbuilt burn and mint mechanism, where one can swap 1 UST for 1$ LUNA, Second option is stablecoin exchange, Curve Finance. Curve provides liquidity pools for stable coins, same existed for UST too, specifically (UST+3crv pool). When people took out their UST they started swapping it into the curve pool. It increased the amount of UST and decreased the amount of other stablecoins, resulting in the destabilization of the pool. To make things worse, at least one individual dumped about $85 Million worth UST tokens, and exchanged them for USDC. This created an imbalance in the pool. Now to tip the scales back, according to the protocols, Anchor starts offering UST at a discounted price. This was the initial step in de - pegging of UST. This eventually resulted in the drowning of LUNA in the market. ![Transaction showing deposit of $85 Million worth UST](https://storage.googleapis.com/papyrus_images/5c05c444e47d9ee71bd45d320113f8aebcd3b057ba1f62b32dd1bb165395ce36.png) Transaction showing deposit of $85 Million worth UST Attack Phase - 3 ---------------- Every blockchain has a safe guard which steps in at the moment of crisis. Luna Foundation Guard (LFG) was Terra’s shield in this case. It dumped non - UST stable - coins worth approximately $216 Million into the curve pool to regain the balance. This technique did work for sometime but the prices continued to degrade as people continued to get out of Terra. Panic played a crucial role in the plummeting of the Market, traders/investors lost their trust in Terra. Now to compensate for the loss in the portfolios, people started selling their other assets to absorb the shock. This resulted in the falling of the market altogether. Do Kwon had already thought about any incident of such kind, some time later after launching UST, he started buying Bitcoin as safe reserves. But those reserves were not enough to compensate for the destruction. This kind of attack forced the blockchain to halt, a decision collectively taken by all the nodes. Conclusion ---------- After the whole month of analyzing , it’s safe to say that we still are at a very early stage, there’s a lot to learn, a lot to unravel, a lot to study. One has to take every step very cautiously because it’s real money at stake here. --- *Originally published on [rohan](https://paragraph.com/@rohan/ust-not-so-stablecoin)*