Terra contagion leads to 80%+ decline in DeFi protocols associated with UST

Published at: May 11, 2022

The knock-on effect of the collapse of Terra (LUNA) and its TerraUSD (UST) stablecoin spread wide across the cryptocurrency market on May 11 as projects with any kind of association with the decentralized finance (DeFi) ecosystem have seen their prices hammered.

The forced selling of the Bitcoin (BTC) holdings backing a portion of UST also influenced BTC’s current drop to $29,000. Analysts fear that DeFi platforms that have liquidity pools primarily comprised of UST and LUNA will collapse.

Terra-based protocols suffer

Projects with the direst of outlooks are those that are hosted on the Terra protocol including Anchor Protocol, Astroport and Mars Protocol.

As shown in the chart above, Anchor Protocol (ANC), Astroport (ASTRO) and Mars Protocol (MARS) saw prices plummet more than 80% since May 4, when LUNA price first started to correct.

The protocols in question are all DeFi-focused, meaning that they had heavy integration with UST as the main stablecoin for their liquidity pairs, as well as LUNA as a major source of value locked on their smart contracts.

As long as UST remains off its $1.00 peg and LUNA trades down 98% from where it was just seven days ago, it is unlikely that these protocols will be able to bounce back and recover from today’s fallout.

The Interblockchain Communication Protocol also took a hit

Assets in the Cosmos ecosystem were also hard hit by UST’s collapse. Cosmos (ATOM) and other tokens like Mirror Protocol (MIR), Osmosis (OSMO) and Kava (KAVA) that utilize the Interblockchain Communication Protocol (IBC) corrected sharply due to their integration with Terra.

The price declines for these assets were less extreme than those hosted on the Terra protocol, but their proxy to Terra has not protected them from contagion.

Maker benefits from the volatility

Maker (MKR) is the one bright spot to emerge in trading on May 11 as crypto traders now find themselves embracing Dai (DAI) as the “best” decentralized stablecoin option in the market.

MKR price spiked 124% in trading on May 11, going from a low of $1,025 to an intraday high of $2,299 before settling back down to $1,278.

As the market digests the current correction and news of fund and protocol collapses emerge, it will be interesting to see how other stablecoin protocols like Frax Share, USDD and mStable perform and whether or not crypto traders will shy away from these projects for more centralized options.

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