The world's third largest stablecoin (stablecoin) TerraUSD (UST) was severely decoupled from the U.S. dollar last week, and the value of Terra's governance token LUNA was nearly zero.
Why does Terra's design cause it to fall into a "death spiral"?
Will other stablecoins be affected?
The risks of stablecoins have already attracted the attention of many governments. After the collapse of UST, is the era of regulating stablecoins and even cryptocurrencies finally coming?
At the beginning of last week, TerraUSD (codenamed UST) was still the third largest stablecoin by market capitalization at $18.5 billion, and the tenth largest cryptocurrency.
The currency price has basically successfully maintained a 1:1 peg with the U.S. dollar over the past year, but since last week, some people sold UST aggressively, causing it to suddenly decouple from the U.S. dollar, and it fell to about $0.16 last Friday.
At the same time, the value of its sister cryptocurrency Terra (codenamed LUNA) plummeted to almost zero from more than $80 at the beginning of the month.
The stablecoin TerraUSD (USDT) has been seriously decoupled from the US dollar, and the related cryptocurrency Terra (LUNA) has almost returned to zero.
(CoinMarketCap)
The so-called stable currency is a cryptocurrency that maintains a stable price by means of asset reserves.
Stablecoins make it easier for traders to convert traditional currencies into cryptocurrencies for trading, it can also be lent as transaction collateral, or generate high interest returns, or serve as some kind of safe haven in the currency market; there are also a few For cross-border remittance.
Most stablecoins are backed by seemingly reliable assets with a 1:1 peg to the U.S. dollar, as well as a guarantee that stablecoin holders can exchange their money back against the U.S. dollar.
At present, the top two stablecoins, Tether (code-named USDT) is backed by commercial paper, which is a short-term corporate bond; USD Coin (USDC) holds cash and short-term U.S. Treasury bonds; Paxos issues the U.S. dollar stablecoin PAX, which is backed by gold as a reserve.
Many governments have already paid attention to the risks of stablecoins. After the collapse of UST, the actions of regulators may be accelerated. U.S. Treasury Secretary Yellen said that it is more urgent to regulate stablecoins.
(Associated Press)
In contrast, UST, Frax, Fei USD, etc. are algorithmic stablecoins and are not backed by these assets.
South Koreans Do Kwon and Daniel Shin founded Terraform Labs in 2018, and successively launched Terra blockchain’s governance token LUNA coin and stablecoin UST in 2019 and 2020.
The algorithm is designed so that for every "minted" new UST, the equivalent of $1 of LUNA is "burned", and vice versa.
When UST falls below $1, traders can burn UST in exchange for $1 worth of new LUNA, which should reduce the supply of UST and push up the value of the currency.
The same is true when the UST price is above $1.
Using this algorithmic mechanism and the arbitrage incentives when there is a slight price difference between the two currencies, LUNA should be able to absorb the fluctuation of the UST currency value, making it very close to 1 US dollar for a long time.
Proponents of algorithmic stablecoins believe that their advantage over general stablecoins is that they are not controlled by a single centralized organization, but are more decentralized and rely on global anonymous traders to maintain currency stability through the blockchain.
However, some academics warn that algorithmic stablecoins such as UST also have their risks…
For details, please read the 317th issue of "Hong Kong 01" e-weekly report (May 16, 2022) "The
value of LUNA is almost zero. Is it time to regulate stablecoins?
".
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The value of LUNA is almost zero. Is it time to regulate stablecoins?
