Terra crunch shakes foundations of crypto stablecoin complex

Failing to live up to their billing as the collapse of the algorithmic token has investors pondering the implications of the tumult for the broader market.

Stablecoins besides TerraUSD are failing to live up to their billing as the collapse of the algorithmic token has investors pondering the implications of the tumult for the broader market.

Most rival algorithmic stablecoins, which use a complex combination of computer code and trader incentives to maintain their pegs of one-to-one to the dollar, are also below that threshold – though not at the 80% extreme seen on TerraUSD on Wednesday.

Read: TerraUSD stablecoin plunges

MakerDAO’s Dai slipped 0.4% before recovering to its peg and Fei slipped 0.5%. Neutrino USD fell 20% over the same period of time, according to data from CoinMarketCap.

Tether, the biggest stablecoin which claims to be backed by actual assets including dollars, was trading slightly off its dollar peg at around 97 cents at 8 a.m. in London, data compiled by Bloomberg show.

USDC, the second largest, was basically holding its peg.

“Algorithmic stablecoins are at an experimental stage currently, nothing more,” said Dan Liebau, chief investment officer for Modular Asset Management’s blockchain strategy. Those backed by an increasing/decreasing amount in the stablecoin’s own protocol token comprise a “particularly risky category,” he added.

Read: Cryptocurrencies drop anew as TerraUSD’s woes cloud the outlook

TerraUSD, or UST, and its related token Luna, had a long way to fall. They both recently climbed into the top 10 tokens by market value after Terra founder Do Kwon established the Luna Foundation Guard, which bought billions of dollars of Bitcoin to back it up.

Terraform Labs, Do Kwon, token, TerraUSD, UST, stablecoin, crypto

Terra founder Do Kwon is counting on the oldest cryptocurrency as a backstop for his stablecoin, which some critics liken to a ginormous Ponzi scheme. Image: Bloomberg

Investors had rushed to take advantage of yields that might reach almost 20% on Anchor Protocol, which is powered by the Terra blockchain.

On Wednesday, Kwon announced measures aimed at bringing TerraUSD back to the $1 peg, which includes minting Luna at an increased pace.

The total circulating supply of Luna has surged to 1.46 billion tokens from 377 million yesterday, data from researcher Messari show.

“The effects of the UST collapse will bring a bit more caution while evaluating for other algorithmic stablecoins for investment,” said Paul Veradittakit, a partner at Pantera Capital in Menlo Park, California.

Also, apps built on Terra/Luna “will likely want to diversify platforms to mitigate risk and apps that are tapping into Anchor for yields will have to tap into other cryptocurrencies and liquidity protocols.”

TerraUSD isn’t the first algorithmic stablecoin whose peg has blown up. Neutrino, which sought to keep at equilibrium by issuing and burning tokens, lost its peg last month. It happened to Iron Finance last June – an incident that caused Dallas Mavericks owner and crypto fan Mark Cuban to call for regulation defining what a stablecoin is, and what collateralisation is acceptable.

“We do not believe that the UST situation means anything for the centralised stablecoin market,” a statement from Tether said. “They are entirely different types of assets.”

© 2022 Bloomberg





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