Stablecoins Unsettled After the Luna and UST . Shock


Stablecoins (stablecoins) shook in value after the two tokens Luna and UST suddenly plummeted.



Since its 2020 launch, Terra's UST token has only had the sole task of maintaining its value at the equivalent of one USD. In two years, the token rarely deviated more than 0.1 USD from that anchor price. It is called a stablecoin - a digital currency that is developed on the blockchain and has a stable value by "imitating" the value of fiat currencies such as the USD or the Euro.



According to CoinMarketCap, the total capitalization of stablecoins is around $170 billion, a fraction of the total $1.2 trillion value of the crypto market. However, they play an extremely important role for crypto traders, as intermediaries to buy tokens on the exchange.

In the latest 6-month financial stability report on May 10, the US Federal Reserve (FED) warned that stablecoins are increasingly used by more people. As of 2018, the coin is also being used more in international trade and as a way to avoid capital controls, according to Joseph Edwards, head of financial strategy at crypto firm Solrise.Currently, there are two main types of stablecoins: those backed by collateral assets such as fiat money, bonds, commercial paper, or even other crypto tokens. Tether (USDT), USD Coin (USDC) or Binance USD (BUSD) fall into this category.The latter builds a "decentralized" algorithm, typically UST. This stablecoin is not held in reserve, rather its value is maintained by a complex mechanism that involves swapping UST coins with a freely floating cryptocurrency called Luna to control the supply.Domino effectFrom May 9, UST could no longer maintain its inherent stability, when it plunged from one USD to 0.03 USD as of the morning of May 13. Not only losing value, the volatility of UST caused a number of other stablecoins to show signs of a similar sell-off.USDT, the world's largest stablecoin with a market cap of nearly $80 billion, is volatile. On May 12, USDT dropped to $0.95 per coin before returning to $0.98. CNBC considers this a surprise, because this stablecoin rarely drops more than $0.97 per coin. The only time it crashed was 5 years ago at $0.91 per coin, but that's when the "crypto winter" started.
Several other stablecoins also fluctuate in price. In which, Neutrino USD (USDN) is currently reduced to 0.8 USD per coin, USDX to 0.7 USD per coin. These are mid-cap and small-cap coins.

USDC, the world's second-largest stablecoin with a market cap of $50 billion, fell slightly from a dollar to $0.99. This coin is not significantly affected due to the strong backing team, such as BlackRock fund managing 10 trillion USD in assets and Fidelity financial group controlling 4.2 trillion USD in total assets.
Experts worry
Experts say that UST's problem shows how difficult it is to control stablecoins. “Tether’s shake shows that players are starting to feel scared of the crypto market, caused by the drop in UST,” said Vijay Ayyar, head of international relations at crypto exchange Luno. , told CNBC.

“This sudden drop is a reminder that the model behind most stablecoins is still highly experimental,” Ronghui Gu, founder and CEO of blockchain security firm CertiK, told The Verge. “In the world of blockchain and Web3, anything can be applied to stablecoins, but no solution is completely convincing yet.”
Meanwhile, the volatility of stablecoins is considered to be discouraging for players in the cryptocurrency market. "Once people lose faith, they'll find a way out," Barclays analyst Joe Abate told the WSJ.

Over the past time, regulators around the globe are also working to establish rules for the crypto environment. According to Reuters, some lawmakers have recommended stablecoins as a particular risk to financial stability. For example, if too many people try to withdraw this currency at the same time, it will cause panic and drastic price fluctuations. In fact, when the UST lost value, millions of withdrawals were made on Binance, forcing the exchange to lock down the exchange for a while.
In its report last week, the Fed also warned that stablecoins are very vulnerable due to their collateral characteristics. They will decrease in value when these assets depreciate, or become illiquid if the market is in a period of stress, thereby adversely affecting traditional finance.
However, some experts believe that Terra's crash will be a big experience for the future crypto market. "Things will be better in 5-10 years," Gu predicted.

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