Stable Coin Crypto-Crash

A stablecoin is a type of cryptocurrency with a value pegged to other assets, usually fiat currencies such as the U.S. dollar. They are designed to maintain a stable price, which makes them popular when it comes to facilitating trading, lending and borrowing of other digital assets.

Some stablecoins, such as USDT USDTUSD, 0.12% and USDC USDCUSD, 0.00%, are backed by reserves including U.S. dollars, cash equivalents and other assets. Others, such as TerraUSD USTUSD, -67.10%, or UST, attempt to maintain their pegs through algorithms.

Investors are supposed to be able to exchange one UST for $1 worth of LUNA, and vice versa. When UST is trading below $1, traders have an incentive to buy one UST and exchange it for $1 worth of LUNA to make a profit. As UST is burnt to mint LUNA, the former’s supply would be reduced and its price will be pushed up. When UST is trading above $1, traders could be motivated to exchange their LUNA for UST. As UST’s supply increases, its price would fall.

TerraUSD briefly fell to around 99 cents on Saturday, before it climbed back to $1 on Sunday. On Monday, the stablecoin lost its peg again, and has since fallen to as low as 23 cents on Wednesday. Luna also plunged, with its price down more than 99.9% to as low as below $0.01, according to CoinDesk data.

A large amount of UST was withdrawn from the most popular applications on Terra starting Saturday, blockchain data shows.

Anchor saw an outflow of more than 4.6 billion UST during the seven days before Tuesday, starting on May 7 and accelerating on May 9, while some addresses were recurring for large and early outflows, noted Aurelie Barthere, principal research analyst at crypto data analytics firm Nansen. Reasons behind the intensive UST outflow over the weekend remain unclear. Some analysts attributed UST’s woes to a loss of confidence among investors.

“I think the whole story is so classic crypto,” Clara Medalie, strategic initiatives and research director at Kaiko, told MarketWatch in an interview. “You’ve never seen so much hype over the past couple of weeks as you have for UST, for decentralized, algorithmic stablecoin, and it’s just crazy how quickly it unraveled,” Medalie said. “It very much captures a lot of hopes for crypto and how stuff can go so wrong, that is untested.”      By Frances Yue

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