The Collapse of Terra’s UST Isn’t the Main Cause of Bitcoin’s Crash: Chainalysis.

A report on the Terra crash has been published by Chainalysis, a blockchain analytics tool. According to the analysis, the Terra fall contributed to the crypto market’s downturn, but it wasn’t the primary cause. Instead of the UST collapse, the research attributes the recent crypto meltdown to a decrease in the tech market. Bitcoin’s link with tech stocks is described as “a relatively new development” by Chainalysis, but Bitcoin remains “strong price correlations” with the S& P 500 Index and the NASDAQ-100 Technology Sector Index, free-falling alongside them.

The UST’s drop, on the other hand, undoubtedly exacerbated the decline in BTC prices. With the end of UST’s decline, however, the influence faded, and BTC values fell back in line with non-crypto tech assets.

Stablecoins were also saved as a result of the collapse, as trade volume increased between the 9th and 12th of May.

During the fall, all types of investors, from large institutional players to retail investors, sold their stablecoins, according to the blockchain analysis website.

What Caused the UST Crash?

On May 7, 2022, Terraform Labs (TFL) announced that it will withdraw $150 million from 3pool, a Curve liquidity pool.

Two users attacked the pool shortly after the withdrawal was made, taking advantage of the pool’s lower liquidity and swapping around $185 million UST for USDC in less than two hours.

TFL responded by withdrawing 100 million UST from 3pool in order to rebalance.

These large trades caused UST to de-peg from the dollar, causing a significant sell-off on exchanges and further lowering the peg.

On May 9, the Luna Foundation Guard (LFG), which controls UST, attempted to save the coin’s peg by selling billions in Bitcoin reserves to counter-buy UST from the market. Unfortunately, the foundation’s endeavor to save the UST was unsuccessful.

What Caused LUNA’s Demise?

For the uninitiated, UST, an algorithmic stablecoin, was supported by smart contract-based algorithms. The algorithm that held UST at its dollar peg was a mint and burn mechanism between LUNA and UST.

With UST’s depreciation, the artificial supply-demand ratio collapsed, allowing for massive arbitrage opportunities.

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Author: Muhammad Asim

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