Terra, Titanic of crypto: When an unsinkable stablecoin sinks

One of the most popular projects in the blockchain industry, whose algorithm promises the stability of cryptocurrency, is suffering a massive financial hemorrhage. A disaster that conflicts even with the price of Bitcoin. Analytics.

necessarily. A stablecoin loses balance and you see its price drop by 35%, it is worth the detour. To refresh your memory, let’s immediately recall the so-called cryptocurrency stable Relying on all kinds of technical and financial mechanisms to ensure that their prices do not fluctuate (too much) with the market.

These digital tokens often find their foothold by pegging their value to a classic asset or currency, not to mention the US dollar. For one purchased stablecoin, the user expects the presence of dollars in the accounts of cryptocurrency developers.

Let’s come next to the Terra stable (UST) regarding the blockchain of the same name. The floor tanks were developed in indirect parity with the dollar via an algorithm that integrates the original Terra token, LUNA. Simply put, to create LUNA, floor cabinets are needed, and vice versa. The protocol provides arbitrage to keep the price as close to $1 as possible.

In a decentralized ecosystem, terrestrial treasuries were until recently the third stablecoin by market capitalization. Except that Tuesday, its price bottomed out by listing at $0.65 on some trading platforms.

panic movement

Terra started shaking last weekend under the influence of massive liquidations. The phenomenon of “panic selling” of geo-treasuries synchronized with massive withdrawals on Anchor, a protocol developed on the Terra blockchain.

Anchor offers decentralized lending services to FinTech companies as well Farming (Passive Income vs Shell Their Cryptocurrency On The Platform). The darling of the crypto industry, Anchor demands an annual return of up to 19.5% (!) on locked deposits. which has recently earned it to attract three-quarters of the floor tanks in circulation.

Investors looking for rewarding investments naturally flocked to the double-digit return platform and needed the stablecoins to tap into.

Critics were quick to point out Anchor’s unsustainability: interest income from borrowing could not cover the payment of returns, so the entire system would be built on trust. In other words, if investors lose confidence, a relentless downward spiral will occur.

Losing faith in anchor rhymes with losses for the stablecoin Terra. vice versa …

An impractical market theory?

The market momentum theoretically helps keep the price of the stablecoin in balance. When the price drops by a few cents, investors usually take the opportunity to buy it at a discount and immediately resell it for $1.

But given the current collapse of the cryptocurrency market, officials at UST, the Singaporean non-profit organization Luna Foundation Guard, fear seeing their algorithms inundated with trading volumes and their stablecoins being swept away by the ebb and flow of tides.

So the officials published funding $1.5 billion in terrestrial treasuries and bitcoin (28205 BTC!) to ensure parity with the dollar. The treatment did not appear to be effective immediately but the gap is narrowing at the time of writing. Floor cabinets are trading at 90 cents. Follow.

Meanwhile, with Bitcoin already under selling pressure from investors fleeing risky assets, BTC’s maneuver to keep Terra afloat exacerbated the crypto’s biggest drop (a dip to last summer’s bottom, not far from $30,000). It is somewhat similar to an emerging country selling its gold reserves to control the exchange rate of its national currency.

Watch out for stablecoin crash

The collapse of terrestrial reservoirs will have repercussions for decentralized finance (DeFi) and send a massive wake-up call to regulators, who are already hugely concerned about the risks to individuals.

Ironically, the Federal Reserve, the US central bank, on Monday published a financial stability report outlining the “weaknesses” of stablecoins and their systemic risks.

This category of stablecoins has seen strong growth, weighing in at nearly $200 billion. The United States is watching them closely, to understand their full potential to address challenges and controversies in cross-border transfers and payments. President Joe Biden unveiled an executive order last March that paves the way for the “responsible development of digital assets.”

However, the Fed is concerned about the focus of this sector and the assets on which the stablecoins are backed. ” Assets that can lose value or become illiquid in a crisisMention the courses. ” These weaknesses can be exacerbated by a lack of transparency regarding risks.»

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