The Earth is collapsing, taking the Moon with it, and maybe vice versa. In any case, cryptocurrency enthusiasts who have staked on the TerraUSD (UST) and Terra (LUNA) token pair are in a cold sweat today as the two digital assets rallied and lost a significant portion of their value by early May 6th. If Luna’s fluctuations are not unprecedented, then UST is causing more problems: this cryptocurrency was indeed presented as a “stablecoin”, a category of digital assets designed to provide a stable price, usually indexed to a different value. But UST is not a stablecoin like the others.
The stablecoin that didn’t exist.
Let’s get back to the concept of stablecoins first: these cryptocurrencies seek to provide their owner with some protection against price volatility, usually backed by an asset or a classic fiat currency. A frequently cited example of a stablecoin is Tether, a cryptocurrency issued by the Hong Kong company Tether Limited, which promises that every Tether token issued on its blockchain will back up one dollar in an account owned by Tether. Limited. The purpose of the maneuver is to ensure parity between the value of Tether and the dollar and allow Tether holders to exchange them for dollars without worrying about price volatility.
“This type of cryptocurrency is especially useful for investors who are looking for a fallback solution to deal with price fluctuations,” explains Emilien Ercolani, co-founder of Maestria Blockchain. Instead of leaving their blockchain investments subject to significant speculation, such as Bitcoin or Ether, investors may be tempted to store their earnings in a “stablecoin” with the guarantee that its value will be indexed against another asset that is considered more stable.
But we can distinguish several types of stablecoins: some, like Tether, choose fiat currencies like the dollar to guarantee the value of their digital asset. Others choose to index the value of their token against another cryptocurrency such as Ethereum-backed DAI. Here, too, the goal is to guarantee a token of stable value, each unit can be exchanged for $1, but here the parity mechanism is the purchase or resale of tokens issued by the Ethereum blockchain.
But UST and LUNA do not fit into these two categories: these two tokens are two sides of another stablecoin model called “algorithmic stablecoins.” These two tokens, issued by the Korean company Terraforms Labs, aim to offer a speculative asset (Luna) used to provide an equilibrium value to the stablecoin (UST). Unlike other stablecoins, UST is not directly backed by another value, but by the Luna token, and therefore aims for indirect parity with the dollar through the Luna token.
The smart contract registered on the blockchain allowed for a stable value of UST: when the value of the token exceeded the value of the dollar, the mechanism planned to dilute its value by issuing more tokens. Conversely, if the price falls, the algorithm automatically “burns” money, i.e. removes certain tokens from circulation in order to artificially raise the price of the token.
But not everything went as planned for UST and Luna. In early May, the values of the ESN and the Moon began to fall. As of this writing, UST is trading at $0.1448 per unit, according to Coinmarketcap, which is a sharp drop for a token whose unit value was set to stabilize around $1.00. Its safe haven, the Moon, is also in free fall and is trading at $0.00002857 per unit.
A real fiasco for this project, which has enjoyed a lot of popularity since the summer of 2021 and has since been frequently mentioned in major cryptocurrencies to watch. The reasons for this high-profile collapse are currently unclear, but as Numerama points out, a major withdrawal of funds occurred on a decentralized finance protocol based on the UST and Luna blockchain, in parallel with significant sales of UST that contributed to its value. the fall.