TeraUSD, also known as ‘UST’, slipped below its 1:1 peg against the dollar this week.
Hong Kong/London:
TeraUSD, the so-called stablecoin that fell in price this week, will be backed by reserves in the future, its co-founder said in a tweet on Wednesday, in an effort to stabilize the cryptocurrency by accommodating its complex pegging mechanism.
Stablecoins are digital tokens that are pegged to the value of a traditional asset, such as the US dollar. They are popular in times of turmoil in crypto markets and are a common medium of exchange, often used by traders to move funds around and speculate on other cryptocurrencies.
TeraUSD, also known as ‘UST’, slipped below its 1:1 peg against the dollar this week, putting the cryptocurrency market under pressure along with already falling stock markets. According to the price website Coingecko, it fell further lower to 30 cents on Wednesday, and then to around 60 cents.
Prior to Monday, TeraUSD had a market cap of over $18.5 billion and was the tenth largest cryptocurrency. It has since lost more than half of that value, and is now the twelfth largest cryptocurrency, with a market cap of about $8.6 billion.
Unlike most other major stablecoins that are backed by other assets, the value of TeraUSD is derived by complex algorithmic processes, linked to another pairing token called Luna, which is free floating.
Luna fell more than 94% on Wednesday to a low of the 85 center and then back to around $1.20.
The co-founder of the company behind the token, TerraForm Labs, announced a “recovery plan” in a series of tweets, saying that the company will seek additional external funding and “rebuild” TerraUSD so that it can be collateralized. This means it will be backed by reserves rather than relying on an algorithm to maintain its 1:1 peg.
“A bailout was to be expected, and UST essentially becoming collateral is the only outcome that makes sense,” said Joseph Edwards, head of financial strategy at crypto firm Solarize.
TerraForm Labs, which says on LinkedIn that it is based in Singapore, and its non-profit partner Luna Foundation Guard, which supports the Terra ecosystem, did not respond to a Reuters request for more information about the plans. .
Terra’s Mechanism
The UST coin should have gained its stability through Luna, created by TerraForm Labs.
One UST coin can be swapped for $1 of Luna, and vice versa, and UST is liquidated (or “burned”) when it is swapped out. If UST falls below $1, traders are encouraged to buy UST instead of Luna, reducing the supply of UST and pushing its price back to $1.
Do Kwon said on Twitter that the company would support a formal proposal made by UST holders to increase the system’s “moulding capability,” or the ability to create new Luna coins. The move “should allow the system to absorb UST more quickly”, he said.
Kya Kwon tried to reassure investors in a tweet, saying “short-term stumbling blocks don’t define what you can achieve” and calling the stablecoin’s collapse a “setback”.
TeraUSD’s de-pegging comes at a time when regulators globally are grappling with the fast-paced world of cryptocurrencies, with some exposing stablecoins as a potential threat to financial stability.
regulatory reform?
In its biennial Financial Stability Report on Tuesday, the US Federal Reserve warned that stablecoins are vulnerable to investor runs because they are backed by assets that can lose value or become liquid during times of market stress.
The chairman of the Senate Banking Committee said in a statement that the collapse of TeraUSD is yet another reason for Congress and regulators to bring stablecoins and cryptocurrencies into the regulatory fold.
“These products, which are far more complex than what consumers think, put Americans’ hard-earned money at risk and have the power to affect the rest of the economy,” Sen. Sherrod Brown said.
In a call with reporters, Republican Senator Pat Tomei said he does not believe algorithmic stablecoins such as TeraUSD are a systemic risk to the financial system, and thus do not need to formulate legislation around the product.
“If there is no systemic risk, it should really be up to the consumers,” he said. “Honestly speaking, there will probably be a few failures in this space for the market to figure out what works and for the successful model to restart our path.”
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)