Cryptocurrency

TerraUSD Falling: Why Did a Stablecoin Crash?

TerraUSD Falling: Why Did a Stablecoin Crash?

The past few days have been turbulent for cryptocurrency holders as the market has suffered severe losses. Leading cryptocurrency asset, Bitcoin, crashed below $30,000, reaching low levels that hadn’t been seen since December 2020.

Bitcoin Value

Despite that happening, the crash that has taken everyone by storm is the decline of a stable coin- TerraUSD. The value of one unit TerraUSD (UST) fell from approximately  $1 to lows of $0.15. 

Usually, this wouldn’t be big news, after all, cryptocurrencies are known for fluctuation. But, it is meant to be different for stablecoins.

What are Stablecoins?

As the name implies, a stablecoin is meant to remain stable regardless of crypto market fluctuations. These cryptocurrencies hold similar values to the currencies to which they are pegged. 

For example, the UST is pegged to the dollar. This implies that at every point, one unit of the token should be valued at $1. Creators of these coins assure buyers of their value by promising to hold assets that match the value of the available tokens.

Stablecoins allow traders to go in and out of different crypto investments without having to use fiats like the dollar.

The Fall of TerraUSD

How did TerraUSD which was seen as one of the fastest-growing stablecoins go from $1 to only a fraction of that?

According to CoinMarketCap, UST was the third-largest stablecoin coin by market cap, behind only USDT and USDC.

TerraUSD relies on another cryptocurrency, LUNA, to maintain its value. To regulate the price and keep it stable, when the price of UST drops below $1, traders can burn UST (remove it permanently from circulation) to get the $1 peg back. The traders are awarded the equivalent of the amount of UST burned in $LUNA.

When the price exceeds $1, traders can also burn LUNA and get the equivalent amount in UST. The LUNA Foundation Guard also had some Bitcoin on the side as collateral. This structure of maintaining the peg appeared to work fine until a few days ago.

During the weekend, a large amount of UST was sold, forcing the price of the stablecoin below $1. This caused more traders to panic and they sold, eventually pushing the value further down.

On 13 May, the UST stable coin was changing hands around $0.156. Its linked cryptocurrency, LUNA has become almost valueless, down to $0.00008123 from its all-time high of $116 in April.

The crash of UST has brought about more calls for the regulation of stablecoins. The argument against these tokens is that they take deposits without providing insurance to customers that their money is protected.

U.S regulators have demanded that operators prove that they have enough assets to pay out customers in the case of occurrences similar to the UST crash.

Can TerraUSD Bounce Back?

Terra’s operators, the LUNA Foundation Guard, attempted to revitalize stablecoin by securing $1.5 billion through fundraising but failed. While there is always a chance for a comeback, many investors appear to have lost trust in the token.

TerraUSD

It would take a miracle for the stablecoin to regain the reputation or adoption that it had before the tragic events of the past few days.

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