Stablecoins: Maybe Not So Stable

🪙 A ‘stablecoin’ is a type of crypto that’s meant to keep its value stable at $1 in order to facilitate transactions between other forms of crypto. 

But earlier today, the price of the world’s third-largest stablecoin – TerraUSD (aka UST) – fell to a record low of 31 cents before regaining ground to around 50 cents as a flood of investors sold their holdings.

💻🌙 What's going on?... Stablecoins are usually backed by cash and other assets that can easily be sold in times of market stress – but not UST, which instead uses a complex mix of code alongside a sister coin called Luna to stabilize prices (making UST what's known as an algorithmic stablecoin).

• In simple terms, Terra’s protocol destroys and creates new units of UST and Luna to adjust supply. When the price of UST falls below a dollar, it can be taken out of circulation and exchanged for Luna, tightening the supply and driving the price back up to $1 – at least, in theory.
• UST’s recent price slide was triggered by a collapse in Luna, which lost more than 80% of its value on Monday amidst a double-digit dip in the overall crypto market.

📋 The bottom line: UST is an experiment in whether stablecoins can remain pegged to the US dollar without having the underlying assets to support that price.

• The world’s first and largest stablecoin, Tether, paid a $41 million fine last October to settle allegations that it lied by claiming its digital tokens were fully backed by fiat currency.