The TerraUSD stablecoin made headlines this week that were not pleasant for investors. UST has managed to lose its currency peg to US dollars. The stablecoin temporarily crashed to a low of US$0.25 on Wednesday, May 11th, as panicked investors sold their holdings. Now the coin has risen to US$0.48, which is still well below parity. Will the stablecoin ever recover from this?
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Why has TerraUSD crashed?
Stablecoins are cryptocurrencies that are supposed to solve the volatility problem that has existed in the blockchain industry for more than a decade.
Broadly speaking, there are two main types of stablecoins: centralized and decentralized. Centralized coins like Tether and USD Coin are controlled by companies to ensure that each coin is backed by real money. In this case, Tether is owned by BitFinex, while USDC is owned by Circle.
Decentralized stablecoins such as TerraUSD, Neutrino, and USDD, on the other hand, are algorithmic in nature. Therefore, they are not backed by hard assets such as the U.S. dollar or bitcoin. Instead, the underlying protocols ensure that the price always stays at around $1. This happens through a continuous process – when UST stablecoins are purchased, Terra (LUNA) coins are burned. We explain what Terra coins are and how to buy LUNA here.
The UST crash occurred when the supply and demand dynamics of the protocol broke down. As a result, the coin crashed to its current low of 25 cents. This means that those who still own UST will lose about 75% of their money if they sell the coins now.
The consequences of this crash have been devastating. The price of Terra Luna also plummeted by more than 90%. Similarly, the native tokens of DeFi platforms built in this ecosystem have plummeted. These include Anchor Protocol, Astroport, and Lido, for example.
Will UST recover?
The biggest question among crypto investors is whether UST will ever recover. In a statement on Wednesday, Do Kwon, the founder of Terra, said that the coin will eventually recover. The statement explained the mechanisms built into the platform to ensure parity is eventually achieved.
Recovery might happen, even if there is little trust in the ecosystem now. Perhaps some may remember that Neutrino also lost parity in April, causing the price to plummet to $0.33. Today, the Neutrino price has risen again to 0.90. Therefore, it is possible that the UST price will also recover. It is also worth noting that Tether has already fallen below the $1 price several times.
The other reason is that investors tend to overreact in such conditions. A good example of this is the collapse of the Russian ruble to an all-time low after the invasion of Ukraine. But today, the currency seems to have recouped the losses and is even trading at a higher rate than it was before the war. Therefore, there is a possibility that the TerraUSD rate will stabilize again when the situation cools down a bit.
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First published in CRYPTO MONDAY, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.
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