But perhaps nowhere have the declines been more painful than among stablecoins – a breed of cryptocurrency designed to never move in price from a peg, often the US dollar or other fiat currency. .
Over the weekend, amid heavy selling pressure, stablecoin TerraUSD – one of the top 10 cryptocurrencies – lost its peg to the US dollar, trading around 98 cents. On Monday, it happened again, with TerraUSD trading as low as 65 cents during Tuesday’s low, and last stabilizing around 90 cents.
The largest stablecoins – Tether and USD Coin – are supposed to be backed by cash or cash equivalents to help these tokens maintain their 1:1 relationship with the US dollar. But Terra is different. An “algorithmic” stablecoin, TerraUSD primarily maintains its dollar peg through a market mechanism involving another token, Luna.
The Terra Protocol allows traders to take advantage of an arbitrage opportunity when TerraUSD weakens below the value of one dollar. They can “burn” a TerraUSD for $1 of Luna, make a profit, and pull a TerraUSD out of circulation when the stablecoin’s price slides below the dollar, or do the reverse when the TerraUSD strengthens.
But as billions of Terra dollars poured in on Saturday, it all came undone, and other algorithmic stablecoins felt the pinch as well. While asset-backed stablecoins like Tether and USD Coin have maintained their peg, tokens similar to Terra wadedwith Neutrino USD trading at 95 cents and Fei USD hovering around 98 cents.
“It remains to be seen whether each project will be robust enough to maintain its foothold in these volatile times,” Delphi Dgital, a cryptocurrency research firm, wrote in a report.
Luna Foundation Guard, the non-profit organization created to support Terra, has swung into action. Terra founder Do Kwon announced in March that the group would start accumulating up to $10 billion in Bitcoin to back the stablecoin as a reserve, and what they have been put to use.
The foundation said on Monday it would lend $750 million worth of Bitcoin to market makers or trading firms, which would help protect TerraUSD’s peg and liquidity. The group also said it would lend 750 million TerraUSD with the aim of accumulating more Bitcoin as market conditions normalize.
Late Monday, Terra defenders were forced to transfer 37,000 bitcoins, or about $1.2 billion at current prices, of the group’s 42,000 bitcoin reserves directly to market markers, according to Alex Thorn, head of research at the crypto financial services group.
by Luna reservations made public fell from $3.2 billion on Friday to $201 million on Tuesday.
Amid the intervention, Luna’s price crashed, plunging a third from around $82 on Friday to $31 on Tuesday. With TerraUSD market capitalization of $16.2 billion against Luna’s $11.4 billion, the very premise of the algorithmic stablecoin – that 1 TerraUSD can always be exchanged for $1 Luna – seems broken.
“Ankle continues to collapse,” Thorn wrote in a note.
As Terra and other algorithmic stablecoins have exploded in popularity over the past year, experts have raised concerns about how the market mechanisms that underpin Terra and its peers could pose a risk to the wider crypto space.
“It’s not as big as a ‘break the ball’ money market fund, but it adds to this lingering anxiety among crypto investors,” noted Michael Safai, managing partner at crypto trading firm Dexterity. Capital. “The longer it lasts, the more it will increase the pressure on Bitcoin [and] Ethereum.
These concerns were confirmed, with traders selling Ether to buy TerraUSD and support the peg, and selling Bitcoin in anticipation of the Luna Foundation Guard liquidating its holdings, The Wall Street Journal reported.
While Bitcoin and Ether prices were up from their worst lows on Tuesday, they remain down more than 20% from a week ago.
“[Luna Foundation Guard’s] Bitcoin’s massive holdings, coupled with the convoluted mechanism by which the coin maintains its peg, have created uncertainty as to how the situation will unfold,” wrote Stéphane Ouellette, CEO of the crypto derivatives firm.
“Ether and Bitcoin are performing relatively in line with recent selloffs,” Ouellette noted. “It is still unclear whether coins can maintain current levels given the evolution [Terra] situation that lacks a clear path to resolution.
Write to Jack Denton at [email protected]