Stablecoins are here to stay despite Terra Luna crash
6/8/2022, 05:30 PM
The recent collapse of the Terra stablecoin and Luna governance token has generated headlines, but it is no indication that the broader crypto asset marketplace is headed for a collapse.
Stablecoins have quickly moved from a niche area of the crypto sector to a type of crypto asset that has been heralded by many as the best of both worlds. By combining the functionality and price stability associated with fiat currencies with the speed, security, and lower fee structure of cryptocurrency, stablecoins have – rightly so – experienced a dramatic increase in both interest and adoption.
TerraLabs, the parent organisation of the Terra stablecoin, seemed like just the latest entrant to this space, and appeared to have come up with an innovative solution to entice additional investment to the project: an algorithmic stablecoin.
Without diving into too much technical detail, the algorithm underpinning the Terra stablecoin was developed to address the fundamental problem with any stablecoin; how is the stabilisation maintained? Usually designed to be traded and used as a 1:1 equivalent with the US dollar, stablecoin issuers attempting to achieve commercial scale and acceptance must have a process in place to maintain this valuation.
Crypto is a volatile and fast-moving space; that much is obvious. Recent volatility, price declines, and even the failure of some projects should not been as the end of the space. The algorithm underpinning Terra enabled the automation of this process, versus manual pegging and adjusting the supply of stablecoins, with the aid of smart contracts and the Luna governance token.
For the purposes of this article, smart contracts can be summarised as executable code that is embedded and connected to a blockchain application. When the price of Terra dipped below or rose above $1, these smart contracts would power the algorithmic process that allowed investors to swap Terra for Luna to either profit from the arbitrage opportunities and/or bring the price back into alignment.
An elegant solution, but one that failed catastrophically.
In addition to the abject failure of the Terra protocol, there has been a broader collapse in crypto prices at large, with Bitcoin - still the largest and most well-known crypto - dropping to levels not seen since the COVID-19 market selloff in Q1 2020.
Despite all of this, and fully acknowledging that the end of crypto has been heralded numerous times, some market actors are calling into question many of the very advancements that have led to broader adoption over the last several years.
Crypto markets might look ugly right now, but this is by no means the end of crypto. Let’s take a look at a few of the reasons why crypto will come back stronger.
Stablecoins have quickly moved from a niche area of the crypto sector to a type of crypto asset that has been heralded by many as the best of both worlds. By combining the functionality and price stability associated with fiat currencies with the speed, security, and lower fee structure of cryptocurrency, stablecoins have – rightly so – experienced a dramatic increase in both interest and adoption.
TerraLabs, the parent organisation of the Terra stablecoin, seemed like just the latest entrant to this space, and appeared to have come up with an innovative solution to entice additional investment to the project: an algorithmic stablecoin.
Without diving into too much technical detail, the algorithm underpinning the Terra stablecoin was developed to address the fundamental problem with any stablecoin; how is the stabilisation maintained? Usually designed to be traded and used as a 1:1 equivalent with the US dollar, stablecoin issuers attempting to achieve commercial scale and acceptance must have a process in place to maintain this valuation.
Crypto is a volatile and fast-moving space; that much is obvious. Recent volatility, price declines, and even the failure of some projects should not been as the end of the space. The algorithm underpinning Terra enabled the automation of this process, versus manual pegging and adjusting the supply of stablecoins, with the aid of smart contracts and the Luna governance token.
For the purposes of this article, smart contracts can be summarised as executable code that is embedded and connected to a blockchain application. When the price of Terra dipped below or rose above $1, these smart contracts would power the algorithmic process that allowed investors to swap Terra for Luna to either profit from the arbitrage opportunities and/or bring the price back into alignment.
An elegant solution, but one that failed catastrophically.
In addition to the abject failure of the Terra protocol, there has been a broader collapse in crypto prices at large, with Bitcoin - still the largest and most well-known crypto - dropping to levels not seen since the COVID-19 market selloff in Q1 2020.
Despite all of this, and fully acknowledging that the end of crypto has been heralded numerous times, some market actors are calling into question many of the very advancements that have led to broader adoption over the last several years.
Crypto markets might look ugly right now, but this is by no means the end of crypto. Let’s take a look at a few of the reasons why crypto will come back stronger.