- Stablecoins are cryptocurrencies whose value is pegged to a reserve asset like a fiat currency or gold.
- They’re supposed to offer investors an accessible entry and exit point into the crypto market without the volatility.
- But Terra’s UST has decoupled from its 1:1 dollar peg and plunged below $0.50 in what could be a “death spiral”.
Terra’s algorithmic stablecoin is the biggest story in crypto right now.
UST, which is supposed to be pegged to the dollar, has seen its price crater in recent days against a backdrop of significant
in the crypto market.
On Saturday, UST started to lose its peg to the dollar and the ecosystem’s governance token LUNA, which plays a role in maintaining the stability of UST, fell 15% in 24 hours.
Having traded at around $80 on Friday, LUNA has since plunged 95% to $2.50. UST, which is supposed to trade at $1, is currently trading around $0.50, according to data from FTX.
Stablecoins derive their value from being pegged to another asset, which is supposed to make them much less volatile than other cryptocurrencies like bitcoin and ethereum. Some stablecoins, like UST, use a combination of algorithms and reserves to maintain the peg.
UST’s plunge could potentially provide ammunition for stablecoin critics. Back in September, Securities and Exchange Commission chair Gary Gensler compared stablecoins to casino “poker chips“.
Insider has compiled a guide of our stories on the largest stablecoins, the key players in the market, and Terra’s crash below.
So, why is Terra’s UST crashing?
The algorithmic stablecoin UST uses a burning mechanism and a reserve of digital assets, such as bitcoin, to maintain its peg to the dollar.
Some crypto investors love the concept of algorithmic stablecoins, because using an algorithm to maintain the peg keeps the asset outside the scope of regulators and governments. Others hate them, because it’s a complex process to maintain the crypto asset’s price stability.
Read more: Algorithmic stablecoin UST has struggled to maintain its peg amid the crypto crash. We spoke to 6 crypto-investing heavyweights who are sounding the alarm on the project — and one who’s making a bull case.
Read more: TerraUSD stablecoin plunges to $0.30 as traders warn of ‘death spiral’ and investors await rescue plan
Read more: A crypto trading behemoth lays out how UST remains a ‘material tail risk’ that could continue to send prices falling through a 3-part self-destructive cycle — and 2 ways its positioning for further volatility ahead of a key market event
UST isn’t the only stablecoin, right?
Terra’s UST is one of many publicly-listed stablecoins. The two largest by market capitalization are tether (USDT) and circle (USDC), which are allegedly backed by fiat reserves, although tether has faced significant scrutiny after an investigation found it had overstated its US dollar backing.
Some stablecoins are backed by other fiat currencies, or by precious metals like gold and silver.
Read more: Tether’s tech chief shares his expectations for crypto regulation as Evergrande’s debt crisis spotlights the quality of assets in stablecoins’ reserves
Read more: The Circle founder Jeremy Allaire explains why he thinks bitcoin will eventually surpass gold to hit $1 million — and charts his route to testifying before Congress last year as one of crypto’s ‘grown-ups’
Read more: The founder of a gold-backed cryptocurrency breaks down why now is the perfect time for investors to buy stablecoins – and explains his prediction that inflation could become “even worse than the 1970s”
What even is a stablecoin, and should I buy them?
The stablecoin landscape can be confusing with new projects continually launching and governments from all over the world making attempting to regulate the ecosystem.
Investors currently have almost no protection if their stablecoin collapses, which is bad news for UST holders if it continues to plummet.
Read more: A guide to the top 3 stablecoins by market capitalization, as the debate rages whether these tokens are the future of crypto or unregulated ‘poker chips’
Read more: Cryptocurrencies, stablecoins and central-bank digital currencies are all the rage. We break down what they are and what you need to know about them
Read more: Crypto billionaire Michael Novogratz lays out the ‘excesses in crypto that should be swatted down’ — and joins Sam Bankman-Fried in sharing his vision for the future of stablecoin regulation as scrutiny intensifies