In the crypto world this week, all that matters is the implosion of one of the world’s largest crypto projects. In 2021, TerraUSD quickly became one of the world’s largest stablecoins — but now its fall might come even faster.
Stablecoins are one of the biggest innovations in crypto — a stable digital currency with cheap transfer fees which (mostly) trades close to $1 with minor fluctuations of a couple of cents.
What happens when stablecoins become unstable?
Historically, they fail — a fate TerraUSD is facing. This week, UST fell below its $1 peg, dropping as low as 30 cents and panicking the crypto world.
- Bank run: People rushed to cash out their UST — which led to its market supply falling from over $18B to nearly $4B at the time of writing.
- Collateral damage: UST maintained its peg using its sister token Terra, and given its algorithmic relationship, also collapsed.
In 2021, Terra’s price soared over 140x — propelling it into the top 10 tokens with a market cap of over $41B at its peak. In just a week, fell 99.9% from $83 to under 3 cents.
Many in the industry call this a targeted attack on TerraUSD — whose perpetrators likely profited from its collapse.
The “Lehman moment” of crypto
The team is pulling out all the stops to save UST — implementing emergency actions to stabilize the token. UST backers tried to raise $1.5B in the past few days with a cold reception from investors.
- If they fail, UST will be joining the graveyard of failed algorithmic stablecoins.
- “This is crypto’s Bear Sterns/Lehman Brother’s moment,” without a government bailout — per Will Clemente, Blockware Solutions Analyst (The Defiant).
The contagion briefly spread to Tether — the largest stablecoin by market cap — which broke from its peg, falling to $0.95 before recovering.
UST’s collapse sets the entire industry back, and it will be difficult to recover from this. UST/Luna has lost investor trust — and investors are now questioning whether algorithmic stablecoins have a future.
Investors: It’s all an experiment
Tether and USD Coin are collateral-backed stablecoins — meaning they can be exchanged one for one with another asset (i.e., bonds/USD).
But UST is an algorithmic stablecoin — which uses algorithms (and its relationship to to maintain its $1 peg. Algorithmic stablecoins are a significant opportunity — but getting it right has been difficult.
After this whole incident, regulations are likely to become a big focus among lawmakers:
- Shortly after UST’s depeg, Janet Yellen called for regulations on the $180B stablecoin industry.
- According to two former SEC lawyers (The Block), the SEC is likely already investigating the UST events.
Reminder: Crypto is still a big experiment, and anything can still go to zero — even the largest projects.
