Stablecoin but not “Stable”

Stablecoins are considered currencies that anchor the exchange rate, closely following the value of fiat money or other assets, minimizing the impact of price fluctuations. Stablecoins were developed with the aim of avoiding the high volatility of prices commonly found in the cryptocurrency market.

Over the past week, the cryptocurrency or cryptocurrency market has experienced unprecedented turmoil with a $200 billion market cap slide in just one day. The single most valuable digital currency in the market is Bitcoin At one point, it fell below $25,000/BTC (May 12 morning), a price not seen since December 2020 and less than 50% of its peak in November 2021. In addition to Bitcoin, Ethereum (ETH) is also down 20% in just 24 hours.

The cause of this drop, as Business Forum once reported, came from Terra and stablecoin UST. Terra’s problems began on May 9 when the price of the UST stablecoin began to slide severely. Due to the way stablecoins algorithmically work, this has caused a significant increase in the supply of the respective Luna crypto token, which is traded with the UST to equalize the price.

Adding Luna tokens to circulation or removing them in the past is sufficient to maintain a consistent price for the UST. But the size of Luna’s slippage and corresponding amount of coins – the supply tripled in a few days – sent the two linked cryptocurrencies into a “spiral of death” from which neither could go. rehibilitate.

Currently, UST is trading at about 40 cents instead of 1 USD and the value of Luna has been almost completely wiped out, dropping from 100 USD to about 1 cent.

Terra’s Nightmare Week makes it clear that stablecoins, which in theory should maintain a fixed price, can in fact be greatly influenced by larger cryptocurrency market movements and affect those that movement.

Cryptocurrency Market Weakness

Terra is not the only stablecoin facing problems following the crypto downturn. Tether’s USDT stablecoin, the largest coin in circulation, has sunk very low below its dollar peg to trade at 95 cents on several exchanges on the morning of May 12, despite the recovered afterwards. The moves are significant enough for Treasury Secretary Janet Yellen to consider in order to reassure the US House of Representatives Financial Services Committee that the events do not pose a significant risk to financial markets as a whole.

However, the sudden drop is a reminder that the economics behind most stablecoins is still highly experimental. Ronghui Gu, CEO and founder of blockchain security firm CertiK said:There are stablecoins backed by fiat but people feel this is too simple – in the world of Web3 and Blockchain, they want to create big, novel ideas and innovations“.

“That is why there is a lot of research on whether it is possible to use algorithms to create a stablecoin, but so far there is no completely convincing solution.”, added Gu.

Terra’s future is uncertain, but the sheer volume of unsettled Terra coins is a big deal for the project. As more coin holders attempt to cash out, they are likely to devalue the supply of Luna tokens even further, creating what Bloomberg’s Matt Levine describes as “a death spiral “.

But Gu remains cautiously optimistic about the broader future of stablecoins. “The crash shows that people have overestimated what can be done with Blockchain and Web3 in a short amount of time, but they still underestimate what can be done in 5 or 10 years.”, he said.

Bitcoin Recovers

Bitcoin recovered on May 13, breaking above $30,000/BTC despite the ongoing woes of stablecoin TerraUSD that has caused panic in the crypto markets.

According to CoinGecko data, the world’s largest cryptocurrency is trading at around $30,262.85 as of 4 a.m. ET on May 13, up 8% over the past 24 hours after it dropped. levels not seen since late 2020 earlier this week.

However, the digital currency is still down 16% in the past 7 days.