The rapid collapse of Terra with its Luna token led thousands of users to wonder about the future of stablecoins and if they are viable.
In response to the volatility of bitcoin and ethereumthe crypto universe launched the stable coins or stablecoinsthat is, digital currencies with fixed prices anchored to another real asset.
Within that group, those most popular were those tied to the US bill, known as digital dollars or, to use a more precise term, crypto dollars. Thus, under the protective umbrella of the blockchain, they aim to avoid the uncertainty of Bitcoin and consolidate as an option for savings and usability. For example, in Argentina they are widely used for the payment of high-value goods such as real estate, automobiles and jewelry.
However, a few days ago an event occurred that covered these digital currencies with a cloak of doubt: USTthe Terra network cryptodollar, lost its parity with the US bill.
An apocalyptic future?
Ignacio Carballo, Crypto & Alternative Finance Consultant (AMI) and Fintech & Digital Banking Ecosystem Director (UCA) points to iProUP that he ecosystem is going through a moment of arduous contraction and fall at their market prices.
“Some factors are endogenous to the crypto sector and some are exogenous to the global economy. Going from the outside in, this is starting to show with the US rate hike, which hit all markets“, he points out. Thus, he refers to the Federal Reserve decision US (Fed) raise the interest rate by 50 basis points, the highest level in the last 20 years.
“At the moment when the Safer investments increase your profitability, capital leaves riskier assets and shelter in the safest“, he details. This generated the fall in the price of Bitcoin and particularly, “it was found that there was an organization of the total value of the assets distributed in a different way: the stablecoin”.
Indeed, there are three types of stablecoins, depending on the type of backup:
- Collateralized with fiat money: secured by reservations in euros or dollars. Parity is very simple: for each currency there is a dollar. For example, Tether (USDT) and USDC (from Coinbase)
- Collateralized with crypto: backed with other digital currencies and automatic regulation (via smart contracts). ICD has triple the reserves (mainly in Ethereum) per dollar
- algorithmic: They do not use fiat money, cryptocurrencies or other assets to support their price. Its parity is achieved through the use of specific algorithms and smart contracts
The latter was what happenedn the case of the Terra network: a smart contract made sure that there would be 1 UST for each LUNA dollar and vice versaissuing or withdrawing from circulation a portion of both currencies to maintain the balance.
Is it the end of stablecoins?
“We are not facing an apocalyptic future. Cryptocurrencies are here to staynot only the private ones, the CBDC (Digital Currencies of a central bank) also have a promising future. What is happening today has to do with a market correction“, points to iProUP Alberto Echegaray, specialist in digital currencies and NFT.
The expert warns that this phenomenon does not only occur in cryptocurrencies; can also be seen in technology stocks, like the ones from Mercado Librewhich came down from $1,800 in August at $900 today.
“This is a product of the amount of money issued by governments. And you see it in crypto as well, though I’m sure Bitcoin and Ethereum are going to get stronger,
Do Kown, leader of Terra
those that do not have a solid project behind them will disappear“, he analyzes.
Can what happened with Terra be repeated?
UST is a stablecoin algorithmic: there is a volatile currency (LUNA) behind it that “cushions” its price. Your quote depends on the demand. “If the first one is in high demand, they ‘burn’ the second one and that works in a stable market. If they have to eliminate many currencies and because of the euphoria of the market this parity cannot be supported, what happened with LUNA and USDT happens,” he points out. Carballo.
According to a survey by the consulting firm run by the economist, more than half of crypto users of the top 10 Latin American markets acquired these assets after the pandemic and they never experienced this volatility.
“Many bought because stablecoins exist. The big difference was that they were not using them as an investment, but as protection from the inflationary context“, details.
Iñaki Apezteguia, teacher and crypto communicator, affirms to iProUP that stablecoins have attracted interest because they have a “mechanism that tends to be worth $1. Its parity with the dollar fluctuates, but it is much lower compared to Bitcoin.” And he remarks that there are various causes why a stablecoin can depreciate, but the main one is by how it is supported.
“The dollar already has inflation, this year it was very marked: that it is one to one does not mean that it will maintain its value. If he collateral is another cryptocurrency, a stablecoin can lose the peg (parity) in the face of a very sharp drop“, he points out.
In the case of ust, He highlights that the algorithmic method he used did not have the expected effect and describes the speed of his fall as surprising. “While it could be foreseen because I had many USTs blocked, mistrust was generated, there were rescue maneuvers that generated confusion and bad marketing for the project. And people began to come off, “she completes.
The expert refers to proposal 1,164, the initial strategy that Do Kwon proposed to better balance UST, expanding the currency pool. The initiative had received 220,000 votes, that is, more than 50% of the Terra community.
It did not turn out as expected and a vicious circle was unleashed. For Apezteguía, “the relationship with the dollar reached very low values, of US$0.25. By default, LUNA lost a lot of value.”
That impacted UST and the cycle fed back. In the sight of him this can happen to other currenciesas the stablecoins that they have not had a similar scenario is because they built legitimacy on their projects in less time.
“LUNA had apparently made it, but DAI is the most respectable project within the stablecoins“, synthesizes.
The other cryptocurrency that failed?
As the week begins, DEI also had problems and lost the peg this Monday. Like UST, it is an algorithmic stablecoin native to the DEUS Finance decentralized finance protocol.
Roberto Sánchez Vilarino, partner of PwC Argentina, account to iProUP what the same thing happened with UST: an aggressive proposal did not have any reference stablecoin nor commodity. “The algorithm showed that it did not work. Even today there is no absolute certainty of what happened, but the basic characteristic was that it had no references in the crypto world,” he says.
According to the expert, any project can fall, since “the vast majority of people who invest in these crypto assets have no idea what is behind it.”
For example, UST leverages on the dollar, while DAI owns a mix between fiat and crypto. “This last one did not do so badly, but you have to see what level of review she has and her loss aversion, because in recent months she has been coming undermining user trusts“, completes Vilarino.
The expert points out that users sometimes know the company, but most of the time it is basically referrals from friends. Today, what determines the value of a cryptocurrency is how does the market see it and they stayed in background other issues, such as Privacysomething that investors do not pay much attention to.
DAI, one of the most used cryptodollars to save
“Today, for example, the energy impact comes into the discussion, which was not previously evaluated. This determines that the crypto economy is evolving“, Says Vilarino, who anticipates that the cryptos are going to have to strengthen their regulatory framework.
“It is not that they are good or bad, each project is different. There are close to 20,000 cryptocurrencies and one must be sure that some will be very successful and others will die“, he concludes.