Is this the Lehman moment for stablecoins?
Recent falls seen in cryptocurrency markets are being blamed on the crash of a stablecoin TerraUSD which fell 90 per cent from its $1 value this week, while its sister token Terra (LUNA) slumped more than 99.97% in the past five days.
Stablecoins are cryptocurrencies where the price is designed to be pegged to fiat money. Stablecoins rely on a more stable asset as a basis for their value. They’re essentially a less volatile cryptocurrency with greater potential to resemble the types of currencies people already use every day. The purpose of stablecoins is to provide stability of price to holders transacting across coins or between fiat and digital currencies because crypto can be volatile.
The popular digital token, TerraUSD, was supposedly pegged to the dollar. Some are even calling this fall the Lehman Brothers moment for cryptocurrencies.
With billions wiped off the cryptocurrency market this week, this could be the beginning of a wider downturn. Terra was intended to have a fixed value, typically $1. Its holders also trusted the coin in the same way you would trust a bank to keep your money safe. Stablecoins such as Terra or USDC, get their stability from large liquid reserves to cover all of the coins in circulation.
According to the Guardian, “Terra is a new breed of “algorithmic stablecoin”, which effectively prints money out of thin air and uses a complex set of “smart contracts” to try to ensure the value hovers as close to $1 as possible. That arrangement worked – until it suddenly didn’t.
Terra “broke its peg”. After hovering about $1 for almost a year, the value of one coin plummeted, first to 70¢, and then further, settling around 35¢ on Wednesday afternoon. The complex algorithmic deal that was supposed to keep the coin trading at a fixed price failed, as investors raced to liquidate their positions faster than the automatic stabilisers could kick in.”
Terra was dubbed the holy grail in the DeFi space. However, it now seems more like a Ponzi scheme come undone than a real reserve backed currency. Terra was backed using a parallel cryptocurrency which failed as well, called Luna. Stablecoins play a critical role in the crypto space to store idle cash and avoid volatility. The two biggest stablecoins, USDC and Tether are backing about $130 billion in cash and cash-like assets. Some are now asking whether Terra’s fall could see USDC or Tether fail in a similar manner?