In the crypto universe, the stablecoin market is in full swing. Why did Terra USD fall? What are the market implications? Decryption.
Panic wind in the stablecoin market. The collapse of stablecoin Terra USD (UST) has had consequences for the ecosystem of stablecoins, but also cryptocurrencies. BFM Crypto makes status.
• How does a stablecoin work?
A stablecoin (or stable cryptocurrency) is a cryptocurrency (or digital asset) that is pegged to a fiat currency such as the euro or dollar. A stack coin can also be backed up by other assets (such as gold). This is called the underlying stablecoin.
When the price of the underlying goes up or down, the value of the stablecoin must match it. The promise is to permanently maintain parity, for example 1 UST = 1 dollar. This binding to a currency is also called a “point”. When there is a gap between the value of the underlying and the value of the stack coin, it is called a “de-point” or “loss of parity”.
Stablecoins, the best known of which include USDT (from the company Tether) and USDC (from the companies Coinbase and Circle), seek in particular to reduce the risk of volatility in the cryptocurrency market.
There are two main types of stack coins:
- The largest (so-called “classic”) stablecoins, which account for about 90% of stablecoin trading today, work like this: A company issuing the stablecoin (eg Tether for USDT) must guarantee to have equal as much in reserve as dollars than stablecoins in circulation. So if a client wants to sell his stack coins for dollars, there is definitely enough money in the coffers of this company to make this conversion. It is therefore a parity based on the stock of “real” money available to the stablecoin issuer.
- Other stack coins, called “algorithmic”, work with reserves located in assets other than the underlying to which it is linked, such as digital assets. These algorithms must make it possible to maintain parity … At least in theory.
• What happened to Terra USD (UST)?
UST (or Terra USD) is the third largest stackcoin in the world with a capitalization at the time of writing of this paper of just over $ 7 billion. It is a so-called algorithmic stablecoin that works with the luna cryptocurrency and cryptographic algorithms. The complex architecture of the algorithms makes it possible to maintain, thanks to the Luna cryptocurrency and a basket of currencies, UST of one dollar, as Laurent Pignot, financial analyst, explained in an article published two days ago on BFM Crypto.
However, in the context of a sharp fall in cryptocurrencies, and especially the luna, the demand for sales was so strong on the latter that the UST algorithms did not withstand this volatility shock. Meanwhile, the Luna Foundation, which oversees the Terra blockchain, had bought a share of bitcoins to intervene in the event of a problem: it mobilized the equivalent of $ 1.5 billion in bitcoins to bring UST back to the balance. , but it was not enough.
To date, the price of UST is around $ 0.50, it has even gone down to $ 0.22, people prefer to sell this asset in a crisis situation.
“At UST, I think the situation can not be resolved for the people who held it. It’s hard to see how it could go up. Who hopes UST returns to its $ 1 point, this scenario looks like to be deviant from day to day because the protocol burns these last reserves to try to re-stabilize the device “, explains BFM Crypto Valentin Demé, journalist at Cryptoast.
For UST to be saved, there are not many possible options: it would require either intervention from investment funds or billions of dollars in emergency aid.
• Why did classic stack coins fall?
Next to UST, there are therefore other so-called “classic” stack coins. These stack coins must therefore guarantee to have as many dollars in reserve as there are stack coins in circulation.
But this Thursday morning, the largest stable currency, the Tether (or USDT), fell below its 1: 1 high, where the dollar traded at $ 0.97. It has returned to $ 0.99 at the time of writing. “We have rarely seen USDT fall so low, but this can also be explained by the collapse of UST, people were scared and preferred to sell other stack coins,” says Valentin Demé. However, the stack coin has increased, which can be explained by the current decline in bitcoin, where people prefer to exchange their bitcoins for stack coins.
“Tether is now very vigilant, because if it were to fall sharply, it would cause investors to sell to recoup US dollars. The project could show its limits and derail the entire cryptocurrency market. On several occasions, Tether has been criticized for not doing so. “Many US dollars like its capitalization, which is currently $ 81 billion. In fact, if all the investors wanted to withdraw their funds and the fund did not have enough, it would cause serious liquidity problems,” said Vincent Boy. market analyst at IG France.
“This catastrophe scenario could make us think of the crash of 1929, when everyone wanted to withdraw their money from the banks, but they did not have enough cash in the coffers,” the latter adds.
• What are the consequences for companies exposed to UST?
The collapse of UST proves that the principle of algorithmic stablecoin has its limitations: this explains in particular why most of the large decentralized financial protocols, such as AAVE, do not approve the deposit of UST as collateral. Users could borrow UST but not provide it as collateral). This means that there will be no “liquidity crisis”, says Valentin Demé.
But other companies had chosen to expose themselves to UST, especially those offering investment services to cryptocurrencies. This is called staking services (loans of cryptocurrencies made for blockchain against interest) or lending (loans of cryptocurrencies made to a borrower against interest), such as the French company Just Mining. Lending is “a validation mechanism that consists of immobilizing a quantity of cryptocurrencies in order to obtain interest”, Just Mining specifies for its part.
Just Mining has just suffered from the consequences on its lending category, as the company has been exposed to 30% of the luna blockchain to generate interest on the protocol, as part of its lending products. But in decentralized finance, there are liquidated pools that make it possible to exchange many stack coins, including UST, DAI, etc. When UST fell, their holders sold so many of them that the liquidity pool was destabilized. This generated a higher than expected exposure to UST, which increased from 30 to 40%. Just Mining makes sure to cover its customers affected by potential losses up to $ 1250.
Just Mining is not the only company affected by this scenario, all those offering bets or lending of cryptocurrencies may also be asked to communicate about the consequences of the collapse of UST.
• What are the long-term consequences?
The collapse of UST and the panic in the stablecoin market “allows us to clean up the stablecoin market”, believes Jonathan Herscovici, founder and head of the French company StackinSat, registered as a service provider on digital assets. (PSAN) at AMF. His company has chosen to only expose itself to bitcoin.
“Luna pulls everyone into the carnage, and it proves that all these very sophisticated systems that give huge returns are gas factories that only lose people money. Their own creators don’t even know how anymore. It works,” he explains.
According to the latter, algorithmic stablecoins may even have similarities to a Ponzi scheme, “with dividend systems that are almost incomprehensible to people. Anyone can understand what lies behind the White Paper on bitcoin, so that on certain cryptocurrencies or stablecoins it is complex return is not complied with, ”he adds.
For him, this situation also reveals a lack of financial education and understanding of how stablecoins or altcoins (cryptocurrencies other than bitcoin) work.
“Investing in cryptocurrencies must be traders whose job it is, otherwise it is almost impossible to understand what lies behind the promises of returns from cryptocurrencies. It is very technical, very sophisticated, it should be almost forbidden for the average saver. Marketing messages are complicated promises to fulfill “, emphasizes Jonathan Herscovici.
Those who pay the price are inevitably holders of cryptocurrencies whose market has been declining for several days. This creates strong feelings of panic, as evidenced by the many posts from Luna cryptocurrency holders on Reddit.
For Jonathan Hercovici, the problem remains the same on classic stack coins. “The company behind it can clearly go bankrupt, that’s the problem of centralization. A stablecoin is supposed to be stable, but in the end it is not, while a bitcoin is equal to a bitcoin,” the latter believes.
Keep in mind that the price of bitcoin has fallen by 50% since November last year, and its peak of $ 69,000, resulting in huge losses for these holders, from individuals to crypto billionaires.
For several months, many regulators have been calling for regulation of the cryptocurrency market and especially the stack coin market, which currently weighs $ 1473 billion for all cryptocurrencies combined.