For those of you living under a rock for the past week, Luna has fallen from the heavens, trading from the ATH of $119 USD down to < $0.001in less than 40 days. The Terra algorithmic “stable coin” UST also has broken the “peg” to the USD, with the stable coin now trading at $0.08 USD.
Various DeFi’s have attempted to launch an algorithmic stable coin to date, however to the best of my knowledge none have successfully maintained the peg to a fiat currency.
In theory, stable coins offer the benefits of cryptocurrency, such as ease of payments and low transaction fees, but without the price risk commonly associated with cryptocurrency.
Now, with stable coins such as BUSD (Binance’s stable coin) that are actually backed 1:1 with fiat currencies this is true, as the stable coin is merely a token redeemable for 1 US dollar, enabling ease of transaction.
Unfortunately with Algorithmic stable coins this principle isn’t in place. Without a fixed fiat ratio backing the stable coin peg, a significant selling volume can deviate price from the peg. When investors, traders, or other corporates holding the ‘stable coin’ see the peg fail they can panic and exit sell, effectively triggering a price avalanche. This is basically what the market has seen with UST.
The failure of UST saw 200 Billion dollars wiped in less than 24 hours. Whilst it’s easy to criticize in hindsight, we’d like to send our condolences to any of our readers if they have had investments in UST or Luna turn to rubble.
Trust is absolutely integral in DeFi and crypto, and events such as this shake the markets’ trust in crypto to the absolute core.
On the bright side USDT, BUSD, and USDC all still are relatively holding the peg to the USD. This extreme stress test has shown that these tokens are up to token. In all honesty, I’m quite amazed that USDT has held the peg considering the common-spread speculation that USDT is not actually backed by USD.
What’s Next For Bitcoin?
Bitcoin has broken the bearish flag pattern. Now the main question to be asked is ‘will bitcoin trade to $10,000?’. I can’t say for sure, but current global economics would indicate continued downside as very likely.