Terra Luna crash: Stablecoins under scrutiny after recent crash
6/8/2022, 05:30 PM
But it is worth noting that the two coins that have collapsed are not as well known as Tether, which has remained relatively stable.
However, even Tether has not been immune to volatility, with its price dipping below $0.90 in March 2020, during the market crash caused by the coronavirus pandemic.
The world of cryptocurrencies was sent into a spin with the collapse of stablecoin TerraUSD and its sister coin Luna, whose prices crashed earlier this month.
There’s nothing new about wild volatility in cryptocurrency prices. But investors were caught by surprise by the sudden drop in TerraUSD’s price, because it is a so-called stablecoin.
As the name suggests, the raison d'être of stablecoins is to remain stable, as they are supposed to be pegged to fiat currency, such as the dollar or the euro.
TerraUSD has been pegged almost exactly to the dollar since its release, but on May 9 it crashed, and it is now worth just over $0.11 (€0.10).
Its sister coin Luna was worth more than $80 (€76) a coin at the start of May, and as of 18 May it was worth a fraction of a cent.
The crash of these two coins has been compared to a mini 2008 financial crisis within the crypto eco-system, with their collapse having a knock-on effect on other digital coins and projects, wiping billions of dollars off the market.
This begs the question: are stablecoins actually stable? What is a stablecoin? Stablecoins are cryptocurrencies that are usually pegged to a fiat currency, such as the dollar.
The most high profile stablecoin is Tether, of which there is around $75 billion (€71.22 billion) in circulation. This makes it the third biggest cryptocurrency behind Bitcoin and Ethereum.
Tether is pegged to the dollar, meaning its value is supposed to remain stable at $1.
This provides cryptocurrency investors with a way to exchange cryptocurrencies, such as Bitcoin and Ethereum, on exchanges, without converting the money to regulated fiat currency.
Investors can also exchange their more volatile cryptocurrencies for Tether to keep the dollar value at that time, because the price is supposed to remain stable at $1.
How do stablecoins remain stable? There are three main ways stablecoins remain pegged to a fiat currency.
Tether is pegged to the dollar, with cash reserves as collateral to prove that each coin is backed by its equivalent amount in dollars.
Tether claims its tokens are pegged at one-to-one with a matching fiat currency and are backed 100 percent by its reserves, the majority of which are made up of cash and “cash equivalents”.
Other stablecoins remain stable as they are backed by reserves of cryptocurrencies.
However, as cryptocurrency prices can be highly volatile, maintaining a one-to-one ratio requires these coins to be backed by more than 100 percent of their value, as the collateral could fall in value.
Finally, as in the case of TerraUSD, other stablecoins are backed by an algorithm that adds tokens to the supply if the price is getting too high, to bring the price back down, or removes tokens from supply if the price falls below the peg.
Are stablecoins actually stable? The demise of TerraUSD and Luna would suggest not.
But it is worth noting that the two coins that have collapsed are not as well known as Tether, which has remained relatively stable.
However, even Tether has not been immune to volatility, with its price dipping below $0.90 in March 2020, during the market crash caused by the coronavirus pandemic.
However, even Tether has not been immune to volatility, with its price dipping below $0.90 in March 2020, during the market crash caused by the coronavirus pandemic.
The world of cryptocurrencies was sent into a spin with the collapse of stablecoin TerraUSD and its sister coin Luna, whose prices crashed earlier this month.
There’s nothing new about wild volatility in cryptocurrency prices. But investors were caught by surprise by the sudden drop in TerraUSD’s price, because it is a so-called stablecoin.
As the name suggests, the raison d'être of stablecoins is to remain stable, as they are supposed to be pegged to fiat currency, such as the dollar or the euro.
TerraUSD has been pegged almost exactly to the dollar since its release, but on May 9 it crashed, and it is now worth just over $0.11 (€0.10).
Its sister coin Luna was worth more than $80 (€76) a coin at the start of May, and as of 18 May it was worth a fraction of a cent.
The crash of these two coins has been compared to a mini 2008 financial crisis within the crypto eco-system, with their collapse having a knock-on effect on other digital coins and projects, wiping billions of dollars off the market.
This begs the question: are stablecoins actually stable? What is a stablecoin? Stablecoins are cryptocurrencies that are usually pegged to a fiat currency, such as the dollar.
The most high profile stablecoin is Tether, of which there is around $75 billion (€71.22 billion) in circulation. This makes it the third biggest cryptocurrency behind Bitcoin and Ethereum.
Tether is pegged to the dollar, meaning its value is supposed to remain stable at $1.
This provides cryptocurrency investors with a way to exchange cryptocurrencies, such as Bitcoin and Ethereum, on exchanges, without converting the money to regulated fiat currency.
Investors can also exchange their more volatile cryptocurrencies for Tether to keep the dollar value at that time, because the price is supposed to remain stable at $1.
How do stablecoins remain stable? There are three main ways stablecoins remain pegged to a fiat currency.
Tether is pegged to the dollar, with cash reserves as collateral to prove that each coin is backed by its equivalent amount in dollars.
Tether claims its tokens are pegged at one-to-one with a matching fiat currency and are backed 100 percent by its reserves, the majority of which are made up of cash and “cash equivalents”.
Other stablecoins remain stable as they are backed by reserves of cryptocurrencies.
However, as cryptocurrency prices can be highly volatile, maintaining a one-to-one ratio requires these coins to be backed by more than 100 percent of their value, as the collateral could fall in value.
Finally, as in the case of TerraUSD, other stablecoins are backed by an algorithm that adds tokens to the supply if the price is getting too high, to bring the price back down, or removes tokens from supply if the price falls below the peg.
Are stablecoins actually stable? The demise of TerraUSD and Luna would suggest not.
But it is worth noting that the two coins that have collapsed are not as well known as Tether, which has remained relatively stable.
However, even Tether has not been immune to volatility, with its price dipping below $0.90 in March 2020, during the market crash caused by the coronavirus pandemic.