Terra, the Titanic of the crypto: when an unsinkable stablecoin sinks

One of the blockchain industry’s most popular projects, whose algorithm promised cryptocurrency stability, is suffering from severe economic bleeding. A debacle that even disrupts the price of bitcoin. Analysis.

Necessarily. A stablecoin that loses its balance and sees its price fall by 35% is worth the detour. To refresh your memory, let us immediately remember that these so-called cryptocurrencies stable rely on all possible technical and financial mechanisms to ensure that their price does not fluctuate (too much) with the market.

Often, these digital tokens find their foothold by anchoring their value to a classic asset or currency, the US dollar not to mention it. For one purchased stablecoin, the user expects a dollar to be found in the crypto developers’ accounts.

So let’s get to stablecoin Terra (UST) in connection with blockchain of the same name. UST is developed in indirect parity with the dollar via an algorithm that integrates Terra’s native token, LUNA. In short, to create a LUNA, a UST is needed and vice versa. The protocol provides arbitration to keep the price as close to $ 1 as possible.

In grace in the decentralized ecosystem, until recently, UST was the third stable currency in terms of market value. Except that this Tuesday, the price hit the bottom by listing at $ 0.65 on some trading platforms.

panic movement

Terra started shaking last weekend under the influence of massive liquidations. A phenomenon of “panic selling” by UST at the same time as major withdrawals on Anchor, a protocol developed on the Terra blockchain.

Anchor provides decentralized lending services to fintech companies as well agriculture (passive income in exchange for immobilizing its cryptocurrencies on a platform). The crypto industry’s beloved, Anchor claims an annual return of up to 19.5% (!) On locked deposits. Which recently served to attract three-quarters of UST into circulation.

Investors looking for rewarding investments naturally flocked to this double-digit return platform, and they needed stack coins to take advantage of it.

Critics were quick to point out the unsustainability of Anchor: interest income from loans could not cover the payment of returns, so the whole system would build on trust. In other words, if investors lose confidence, a relentless downward spiral follows.

Loss of confidence in Anchor rhymes with losses for stablecoin Terra. And the other way around…

An impractical market theory?

Market momentum theoretically helps keep the price of a stack coin in balance. When the price drops by a few cents, investors usually take the opportunity to buy it at a discount and resell it immediately for a dollar apiece.

But in light of the current encryption in the crypto market, officials at UST, the Singaporean non-profit organization Luna Foundation Guard, feared seeing their algorithm overwhelmed by trading volumes and their stablecoin being swept away by the falling tide.

Those responsible had therefore invested funds $ 1.5 billion in UST and bitcoins (28,205 BTC!) To guarantee parity with the dollar. The remedy did not seem to be effective right away, but the gap is widening at the time of writing. UST is trading at 90 cents. To be continued.

Meanwhile, with bitcoin already under selling pressure from investors fleeing risky assets, BTC’s maneuver to keep Terra afloat has likely exacerbated the biggest drop in cryptocurrency prices (falling back to the bottom last summer, not far from $ 30,000). A bit like a emerging country selling its gold reserves to control the exchange rate of its national currency.

Beware of the stablecoin crack

The collapse of UST would have consequences for all decentralized finance (DeFi) and send a gigantic wake-up call to regulators who are already significantly concerned about risks to individuals.

Ironically, the Fed, the US Federal Reserve, on Monday released a report on financial stability, in which the “vulnerabilities” of stablecoins and their systemic risks point to.

This category of so-called stablecoin digital currencies has experienced strong growth weighing nearly $ 200 billion. The United States is following them closely to understand their full potential to deal with challenges and frictions in cross-border money transfers and payments. President Joe Biden unveiled an executive order in March last year that paved the way for “responsible digital asset development.”

However, the Fed is concerned about the concentration of this sector and the assets on which stack coins are based. ” Assets that could lose value or become illiquid in a crisis “, states the rapporteurs. ” These vulnerabilities may be exacerbated by a lack of transparency regarding risk.»

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