One of the hallmarks of cryptocurrency has been the creation of stablecoins, a type of token that is backed 1:1 with a denominated currency; Usually this has been the U.S. Dollar. This has allowed for both ordinary people and corporate giants to more easily deploy capital into the cryptocurrency space and invest without having to deal with multiple banks and exchanges in-between.
This has created a massive pool of liquidity in cryptocurrency that people have questioned on numerous occasions as having zero backing. If you buy a stablecoin, how do you exchange it for dollars? Where are reserves kept? What are the reserves? This has brought many stablecoins under heavy government scrutiny, such as Tether (USDT).
At hasn’t been until now that we’ve had our first incident. One that is so profound, it threatens the cryptocurrency industry and raises many eyebrows. In the past week, we witnessed the demise of TerraUSD (UST), one of the most popular stablecoins globally behind only Tether, Binance USD and USDC in popularity.
TerraUSD is a product of Terraform Labs, who’s own cryptocurrency (Luna) has also taken a massive hit. So, what happened?
The cryptocurrency industry has been in a bear market for months now. We’ve seen massive dips and downswings in prices across the space as investors move to cash to embrace possible recession and rising interest rates. TerraUSD is a unique stablecoin. It’s algorithmic and smart contract based. That means it’s reserves are predetermined investments. A majority of its backing was held in Bitcoin and other cryptocurrency assets, instead of U.S. Dollars.
As a result of the declining industry and high risk asset backing, TerraUSD lost it’s 1:1 dollar peg, causing panic and a dramatic exodus from the stablecoin, further sinking the price. The price of TerraUSD is now worth $0.15 at the time of writing this article…
Some believe TerraUSD was manipulated by investment giants BlackRock and Citadel, one of which you may recognize from the GameStop short that ignited the commercial investor spectacle and memecoin industry. A lot of speculation has evolved stating that both entities facilitated a massive short against TerraUSD in order to make billions of dollars in profit.
“Rumors that BlackRock had a role in the collapse of UST are categorically false. In fact, BlackRock does not trade UST,” said spokesperson Logan Koffler.
In comparison to Tether or USDC, TerraUSD is much different. The former hold most of their reserves in cash, cash equivalents, bonds and U.S. treasuries. Paolo Ardoino, Tether and Bitfinex’s chief technology officer, took to social media to reassure people of Tether’s strong backing.
“Unlike these algorithmic stablecoins, Tether holds a strong, conservative and liquid portfolio that consists of cash & cash equivalents, such as short-term treasury bills, money market funds and commercial paper holdings from A-2 and above rated issuers.”
In the meantime, this serves as a huge learning opportunity and moment of clarity for stablecoin projects. Appropriate backing and transparency is crucial to maintaining a healthy ecosystem in the cryptocurrency space. With crypto in a bear market cycle, this must remain resilient so investors don’t get deterred further and regulators don’t clamp down harder.
Head of Operations, Blocolombia
“Tether CTO Says, USDT-Dollar Remains Strong Amid Stablecoin Crises.” NewsBTC, 12 May 2022, https://www.newsbtc.com/news/tether-cto-says-usdt-dollar-remains-strong-amid-stablecoin-crises/. Accessed 13 May 2022.
Doherty, Katherine, and Yueqi Yang. “Citadel Securities, BlackRock Deny Involvement in Terra Fall.” Bloomberg, 11 May 2022, https://www.bloomberg.com/news/articles/2022-05-11/citadel-securities-says-not-involved-in-terra-stablecoin-crash. Accessed 13 May 2022.