The decentralized backed reserve introduced by the terra foundation could be one of the major reasons for UST and LUNA free fall, a decentralized coin backed by another volatile decentralized coin could be quite detrimental when there is instability in the market a free fall is imminent when a bear market creeps in.
The past couple of days have been a hard moment for terra holders with the sudden crash of the token making it below 0.1 cents from an all-time high of over $100, a whole bunch of speculation has been circulating lately which have left investor in a blank space to what could have lead to such massive dump of one of the top leading blockchain network tokens.
Decentralized backed reserve
Terra foundation aims to take crypto transparency to a different level by introducing first of its kind decentralized backed stable coin since blockchain technology is typically all about accountability the team wanted to have a decentralized backed stable coin that is free of centralized collateralized assets. The idea was to back terra UST with Bitcoin worth billions of dollars which will serve as a reserve against price fluctuation in a bear market. why BTC reserve
Although the team was fully aware of the risk involved with the reserve backing, in a nutshell, users can swap $1 LUNA for 1 UST and vice versa, driving UST supply low and putting higher pressure on LUNA price, this means a single market crash could significantly affect the price of LUNA and UST a fall in UST backed reserve could significantly impact on both UST and LUNA.
The mechanism is rewarding during bull runs but can be detrimental during a market crash when there is less incentive to mint either of the two coins to keep the peg intact.
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Knowing what could transpire when there is a market crash terra team would have considered a more strategic means of backing UST with a non-volatile backup reserve, backing a decentralized token with another decentralized coin is quite very risky with BTC crash the UST peg was unable to hold its price at $1.
I suppose before a new plan to roll out another decentralized backed stable coin for any blockchain network will be approved more scrutiny and analysis will be carried out to weigh the implication of such backing having a decentralized backed stable coin to another decentralized backed value asset isn't such a good idea for networks as such the fiat-backed system has proved to be more liable since they are not subject to market volatility.