Stablecoins are trying to stay afloat in the crypto-crash

crypto-crashcrypto-crash

Due to crypto-crash The coin was once tied to the dollar the Terra’s UST coin is currently being sold at 40 cents.

It’s been a gruelling couple of weeks in the Terra project, during an entire week that’s been brutal to cryptocurrency in general.

In the last couple of days TerraUSD (UST) stabilcoin intended to ensure the dollar’s peg, decoupled significantly from the $1 mark , and fell to a value of just 30 cents the 10th. In the most recent update the beleaguered project shut the entire cryptocurrency to a standstill for approximately 2 hours on Thursday. It then froze users’ funds until the blockchain was restored.

This is a serious move due to cryptocurrency’s focus on decentralization. “We have seen hard forks before, but this is the first time we’ve seen such a big, decentralized blockchain system decide to halt the entire thing,” said Ronghui Gu, CEO and founder of the blockchain security firm CertiK.

.THIS IS THE FIRST TIME WE’VE SEEN SUCH A BIG, DECENTRALIZED BLOCKCHAIN SYSTEM DECIDE TO HALT THE ENTIRE THING”

Stablecoins are trying to stay afloat in the crypto-crash
crypto-crash

The chaos has been caused by a raging decline that saw the value of $200 billion lost in a single day. Bitcoin in particular dropped to less than $25,000 in the early morning of May 12 which is the lowest level seen since December 2020 , and less than half its high on November 20, 2021. Other cryptocurrency have had to endure the same fate in recent days and Ethereum being the worst offenders, having lost 20% in value within the span of just 24 hours.Terra’s troubles began on the 9th of May, when prices of UST stablecoin began to drop rapidly. Due to the way algorithms work, these stablecoins led to a massive increase in the supply the equivalent Luna cryptocurrency token which is exchanged against UST to help balance the price.

Luna after crypto-crash

The addition of Luna tokens to circulation or taking them out was once enough to ensure the same cost for UST. However, the magnitude of the decline in price and the amount of Luna created — supply nearly tripled within a matter of days — put both cryptocurrencies into an “death spiral” from which neither of them has been capable of recovering.

At present, UST is trading at about 40 cents instead $1. The value of Luna is almost erased, crashing from $100 to just 1 cent.

UST value from May 7th until the 12th of May.

Effect on Terra due to crypto-crash

Terra’s worst week has shown that stablecoins, which theoretically have a fixed price but are in actual fact significantly affected by larger cryptocurrency market changes — and can affect these movements later on.

Terra isn’t just the one stable coin to face issues as a result of the downturn in cryptocurrency. Its USDT stablecoin, which is its largest in circulation, plummeted below its peg to the dollar to be trading with a price of 95 cents certain exchanges early on Thursday but it has rebounded. The shifts were significant enough the Treasury Secretary Janet Yellen weighed in to ensure that the US House Committee on Financial Services that the developments didn’t pose any significant threat to the financial markets in general.

“THERE ARE FIAT-BACKED STABLECOINS BUT PEOPLE FEEL THIS IS TOO SIMPLE”

However, the abrupt drop is an indicator that the economy behind the majority of stablecoins are extremely exploratory. “There are fiat-backed stablecoins but people feel this is too simple – in the web3 and blockchain world they want to create big, novel ideas and innovations,” Gu. Gu. “That’s why there is so much research on if it’s possible to use algorithms to generate a stablecoin, but so far there are no completely convincing solutions.”

Terra’s future after crypto-crash

Terra‘s future remains uncertain However, the massive amount of un-redeemed Terra coins is a major issue for the project. As more holders of coins attempt to take their money out, they’re likely to reduce the value of Luna tokens further which could lead to the situation that is described by Bloomberg‘s Matt Levine described as “a death spiral.”

However, Gu remains cautiously positive about the future for stablecoins. “The crypto-crash shows people have overestimated what can be done with blockchain and web3 in a short period of time,” Gu says, “but they still underestimate what can be done in five or ten years.”

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