TerraUSD , one of the largest stablecoins in the world, lost a third of its value on Tuesday (10/5/2022) due to a decline in the crypto market. That spooked crypto investors and contributed to Bitcoin’s recent decline.
TerraUSD, also known as ‘UST’, is a so-called algorithmic stablecoin , one of the largest by market cap. On Tuesday, UST broke its 1:1 benchmark against the dollar which sent the price down to touch USD 0.6879
Even so, at the time of writing, Wednesday (11/5/2022) morning, the UST price slightly recovered to the level of USD 0.8197
A stablecoin is a digital token that is pegged to the value of a traditional asset, such as the US dollar . They are popular as a safe haven in times of turmoil in the crypto market. Stablecoins are also a common medium of exchange, often used by traders to move funds and other cryptocurrencies.
UST rose to prominence earlier this year when the nonprofit Luna Foundation Guard affiliate Terraform Labs, the company behind TerraUSD, pledged to raise $10 billion worth of bitcoin to back its dollar stake.
Unlike other Stablecoins that hold reserves in traditional assets, TerraUSD maintains its stake through an algorithm that moderates supply and demand in a complex process that involves the use of another offsetting token namely Terra (LUNA).
The Luna Foundation Guard said in a tweet on Monday they would retain the TerraUSD dollar pegged via USD 1.5 billion in loans to over-the-counter trading firms, half in Bitcoin and half in TerraUSD.
Sales director at Amber Group, Justin d’Anethan, said the use of Bitcoin as a reserve has created a vicious cycle for TerraUSD, with the sell-off in both tokens pushing the other lower.
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“Bitcoin is down because it is being sold to maintain a suffering ecosystem, the suffering of the ecosystem is creating more panic (TerraUSD), which weighs on the Luna token, which requires the foundation to use more reserves to supplement and maintain the stake,” said d’Anethan, quoted by Channel News Asia. , Wednesday (11/5/2022).
In its biennial Financial Stability Report on Tuesday, the US Federal Reserve warned Stablecoins are vulnerable to investors because they are backed by assets that can lose value or become illiquid in times of market stress.
Stablecoins as an asset class generally benefit from market volatility in the crypto market. Three stablecoins are now in the top 10 cryptocurrencies by market cap, with TerraUSD ranked eleventh.
Other major stablecoins, such as Tether and USDC, say they are backed by real assets and thus not vulnerable to the same problems that plagued TerraUSD.