Luna Foundation Guard stabilizes TerraUSD stablecoin

The non-profit governance organization behind TerraUSD (UST), the third-largest stablecoin by market cap, is taking measures to shore up its stability after getting knocked off its dollar peg.

Why it matters: In theory, algorithmic stablecoins are supposed to be self-regulating, but volatility surrounding UST has called that into question.

Driving the news: UST fell off its dollar peg on Saturday, going as low as $0.985 before rebounding to $0.995.

• The Luna Foundation Guard (LFG), which oversees all things related to Terra, has since voted to lend $750 million in bitcoin and $750 million in UST to over-the-counter market makers to keep the stablecoin pegged to $1.

How it works: Unlike stablecoins such as Tether's USDT or Circle's USDC, UST is not governed by a centralized organization or backed by other assets.

• Instead, it maintains its peg to the dollar through a mint-and-burn mechanism using the Terra ecosystem’s governance token, LUNA.
• It lets people redeem 1 UST for $1 worth of LUNA, burning the UST in question and removing it from circulation during the transaction.
• Whenever 1 UST isn't equal to $1, traders can swap the UST for the $1 in LUNA, making a small profit and rebalancing the stablecoin peg.

Yes, but: UST dropped over the weekend as traders sold it in exchange for other stablecoins.

Of note: This all comes as other stablecoins like tether have faced questions over what they're actually backed by.

What we're watching: How regulators approach algorithmic stablecoin governance in a decentralized finance world.

• After all, it's one thing to regulate centralized stablecoin issuers like USDC's Circle, but a whole different animal to manage a decentralized and algorithmic stablecoin like UST.

Editor's note: This story has been updated to fix a typo in the headline.