UST is Terra-coin, which collapsed 3 days ago.

USDT, Tether, is a completely different coin. the one we're discussing today.

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UST + Luna had substantial reserves. They proved it with their actions this past week. They weren't *enough* reserves mind you, but they were posting their BTC-wallets on Twitter and showing the movements.

Yes, sorry that wasn't clear, and I said Tether when I meant stablecoin in general. I meant that they didn't have the reserves they needed ("substantial" isn't good enough) and now Tether has an even bigger incentive to run uncollateralized because of who they are.

"stablecoins in general" doesn't really apply here since the two in question work radically different. Collateralized vs Algorithmic. Theoretically the Terra UST stable coin didn't need reserves to keep the peg at $1, unlike Tether USDT, which does.

how do algorithmic stable coins work?

The idea behind UST was that if it falls below $1, you can redeem it for $1 of Luna instead. The idea being that UST is "backed" by the activity on the terra Blockchain (fees are paid in Luna)

Of course, that means if UST is below $1 there is an arbitrage loop. buy UST at a discount, redeem it for Luna, sell Luna for USDC, repeat

This causes downward pressure on Luna's price. As Luna drops so does the faith in UST recovering, you end up with.... Luna dropping from $100 to $0.01, there's nothing backing UST effectively and it's still trading below peg (around $0.40)

Read any of the recent Matt Levine Money Stuff columns on Bloomberg that has "Stablecoin" in the title (rather than Musk/Twiter...)

poorly, it turns out