In the crypto world this week, all that matters is the implosion of one of the world’s largest crypto projects. In 2021, TerraUSDUST

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 TerraLUNA
  , and given its algorithmic relationship,LUNA
  also collapsed.

In 2021, Terra’sLUNA

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,LUNA

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 TetherUSDT

— 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 toLUNA

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.