A dollar pegged stablecoin, TerraUSD has lost its peg twice over the past few days and has not recovered yet. The algorithmic stablecoin broke its peg this Monday again, hence it is necessary for regulators to have a look at this particular model of stablecoin.
The collapse of TerraUSD has come up with several risks ranging from an investor, and retail to institutional. TerraUSD is supposed to be a stablecoin, meaning that it should maintain the ratio of 1:1 to the U.S dollar.
But its price has fallen down to 23 cents and has a 24-hour high of 92 cents which is a normal amount of crypto volatility but it is supposed to maintain the ratio with the U.S dollar is the twist.
Stablecoin is a type of cryptocurrency whose value is stable in reference to another asset, such as the dollar. Which can be used as an intermediate unit of exchange or can be used to buy goods and services using crypto without having to worry about crypto volatility.
The issuer of stablecoin says that you find a matching U.S dollar in the bank account for every unit of their respective stablecoin in circulation. Further Stablecoins like Tether ($USDT), USDC($USDC), and Binance Dollar are also backed by reserves.
The unused stablecoin like Diem (formerly Libra) is intended to be issued by an organization launched by Meta (formerly Facebook) backed by a basket of various assets, But in the case of original Libra, it would have been issued by a different set of currencies.
Now let’s consider the theory of algorithm stablecoins, let’s consider the idea of two tokens, rather than being backed by 1:1 by dollars. The two tokens are considered as stablecoin itself and a sister token created or destroyed as needed to maintain the price of stablecoin.
The Luna Foundation Guard, a Singapore- registered non-profit entity meant to support UST’s price stability, which can be used to maintain its peg.
The website of Luna Foundation Guard further continues that, The value of Terra’s family of stablecoin is maintained through a system of arbitrage incentives, open market operations, and dynamic protocol levers, unlike the other stablecoins backed by fixed deposits of the pegged fiat currency.
The outside impact on Terra lose
Yes, a lot of people are losing money or lost money on UST and Luna, and now the regulators are paying attention to the stablecoins. A treasury Secretary, and a representative of the Financial Stability Oversight Council (FSOC), Jannel Yellen have already brought UST up, in a hearing of the Senate Banking Committee.
Yellen told Senator Pat Toomey (R.Pa) on Tuesday that ” I would note that there was a report just this morning that a stablecoin known as TerraUSD had experienced a run and had declined in value.” continue, “I think that simply illustrates that this is a rapidly growing product and there are risks to financial stability and we need a framework.”
LFG was further rumored about funding $1.5 billion to help UST’s peg to prop up. as similar to the Guard loaned $1.4 billion in bitcoin (BTC) for the same reason.
Whatever is happening with Luna and JUST doesn’t seem to have an influence on the broader crypto market. and it takes time to actually mark out the reasons for its fall down. And what actually went wrong and other additional risks associated with them as well.