Unstablecoin: Terra halted its blockchain as UST tumbles toward $0

New activity on the Terra blockchain was halted Thursday as the luna cryptocurrency tumbled sharply and its sister stablecoin, known as UST, sank nearly to zero.

“Terra validators have decided to halt the Terra chain to prevent governance attacks following severe [luna] inflation and a significantly reduced cost of attack,” Terraform Labs said in a tweet. The blockchain resumed activity less than two hours later, after code patches had been applied.

The move capped a tumultuous week for luna and UST, which also turned a spotlight on the risks of stablecoins and the broader crypto market. The crisis was triggered by a sharp drop in the value of UST. The stablecoin was supposed to be pegged one-to-one to the U.S. dollar, and exchangeable for luna dollar-for-dollar, but began sinking below $1 over the last few days.

Unlike most stablecoins, which are backed by reserves of fiat currency or commercial paper, UST relies on algorithms that dynamically seek to control the supply of UST and luna to maintain the stablecoin’s value at $1.

The Luna Foundation Guard, a nonprofit launched by Terra founder Do Kwon, has reportedly bolstered its bitcoin reserve by $1.5 billion in order to back UST, but those reserves don't seem to be nearly enough to stem the losses. UST and luna were collectively worth $43 billion at the start of the year, but had fallen under $5 billion Thursday as both plummeted in value.

Alex Johnson, author of the Fintech Takes newsletter, said halting the Terra blockchain was not surprising given what has become a “death spiral.”

“That’s what they're trying to prevent by pausing it,” he told Protocol. “I don't really know what pausing it is going to do, because once you shake the confidence in this thing, it may take a little while, but eventually it goes down to zero.”

Other stablecoins have been feeling the pressure. Tether, which has faced questions about the strength of its reserves, briefly lost its peg to the dollar Thursday, falling to 95 cents before recovering.

The crypto market overall has lost more than half of its value since its peak in November.