An epic crash in algorithmic stablecoins spells trouble for the entire industry.
restaurant in North London a few weeks ago, a handful of small-time but remarkably discerning retail cryptocurrency investors predicted that terra and luna would crash. Several of them were scoffing at terra, or UST, a stablecoin whose price equivalence to the dollar is underpinned by algorithms and game theory rather than cash or collaterals, and at the notion that it would maintain its peg in the long run.
Meanwhile this week, the wider crypto market is in turmoil as bitcoin fell to $27,000 after bleeding 8 percent of its value in 24 hours, and many other cryptocurrencies are trailing its descent. Tether, the world’s largest stablecoin, dropped under $1 on Thursday. On Terra’s own blockchain, UST has a symbiotic relationship with its satellite asset luna, which can be used to earn cryptocurrency rewards. It was always possible to exchange UST for luna and vice versa, and the blockchain’s own code always made sure that terra traded at a dollar a unit, while luna’s varying price was determined by algorithms keeping an eye on the market.
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