Today marked the most troubled day in all of Terra history.
UST lost its peg to USD, trading at an All-Time-Low of 0.60 USD in Binance.
We’ll review the fundamentals behind Terra ecosystem and the timeline of events.
The price of UST is pegged to USD by allowing people to reedem UST for an equivalent amount of LUNA: 1 UST is reedemable by 1 USD worth of LUNA, regardless of UST price.
Reedeming UST for LUNA increases the supply of LUNA and decreases the supply of UST (burns UST, mints new LUNA). This way supply-demand law, this will decrease the price of LUNA and increase the price of UST.
However, what happens if the market cap of UST is close to or higher than the market cap of LUNA, and everybody wants to sell their UST? (as in, today)
Lets imagine a situation where market cap LUNA = market cap UST and everyone uses redeems their UST. This would increase the supply of LUNA x2, inmediately halving its price. Thus, people would only get 0.50 USD for 1 UST.
Today, the situation is even worse than this, as market cap UST > market cap LUNA (15B and 12B USD).
Due to the insufficiency o