The sale of cryptocurrency, which was supposed to be pegged to 1 dollar, accelerated on Wednesday, briefly raising its value by less than a quarter of that value.
According to CoinDesk, TerraUSD traded 23 cents on Wednesday. As of 8:53 a.m. ET, it had partially jumped to about 30 cents in volatile trading.
Stablecoin, this breed of cryptocurrency has won the affection of traders for being the only part of the cryptoworld known for its stability. While the most popular stablecoins maintain their level with assets that include debt and cash in dollars, TerraUSD is what is known as an algorithmic stablecoin that relies on financial engineering to maintain its relationship with the dollar.
The TerraUSD peg broke last weekend with a series of major TerraUSD withdrawals from the Anchor Protocol, a kind of decentralized bank for crypto investors.
The Anchor Protocol is built on the technology of the same Terra blockchain network on which TerraUSD is based. This has been a major factor in the growth of stablecoin in recent months, allowing crypto-investors to make a profit of almost 20% per year by lending their TerraUSD holdings.
At the same time, TerraUSD was also sold for other stablecoins backed by traditional assets, through various liquidity pools that promote peg stability, as well as through cryptocurrency exchanges. The sudden outflow of money frightened some traders who started selling TerraUSD and its cognate token Luna. Before its peg was broken, TerraUSD was the third largest stablecoin with a total market value of $ 18 billion.
According to CoinDesk, the TerraUSD’s drop to 23 cents around 3:30 a.m. Eastern Time marked a 70% drop in its value 24 hours earlier.
Even as TerraUSD began to recover some value after reaching its low, Luna continued to fall. The token was down 97% from the previous 24 hours at 8:53 a.m. ET and traded at 99 cents.
“I understand that the last 72 hours have been extremely difficult for all of you – know that I am determined to work with each of you to survive this crisis, and we will work out a way out of it,” wrote Do Kwon of the South. The Korean developer who created TerraUSD, on Twitter on Wednesday.
Stablecoins have grown in popularity over the past two years and now act as a lubricant that drives the gears of the cryptocurrency ecosystem. Traders prefer to buy coins such as bitcoin, ether and dodgecoin using digital assets pegged to the dollar because when they buy or sell, the price moves only on one side. They also allow for quick trading without settlement times related to currencies issued by the government, which can take several days.
The value of bitcoin on Wednesday fell to $ 29,460.20, down 4.8% from 17:00 ET on Tuesday. In the last week alone, it has lost about 25% of its value.
In the past, TerraUSD has maintained its price of $ 1, relying on traders who acted as its backing stopper. When it fell below the peg, traders “burned” the stablecoin, removing it from circulation, exchanging TerraUSD for new Luna units worth $ 1. This action reduced TerraUSD’s offer and raised its price.
Conversely, if the price of TerraUSD rose above $ 1, traders could burn Luna and create a new TerraUSD, thus increasing the supply of stablecoin and lowering its price to $ 1.
Such a model has drawn criticism because it relies on the collective willingness of people to support cryptocurrency. Without this, stablecoin could quickly sink, which industry participants have described as a “death spiral”.
Martin Hisbock, head of blockchain and crypto-research at the Uphold digital money platform, compared what is happening with TerraUSD and Luna, to bank running. “People don’t trust me anymore, they run to the exit,” he said.
Mr. Kwon, the founder of TerraUSD, also co-founded the Luna Foundation Guard, a nonprofit that helps support and maintain TerraUSD.
Earlier this week the foundation said he borrowed $ 750 million bitcoin trading firms to protect the stablecoin peg. Blockchain entries of the fund’s wallet show that it no longer stores bitcoin in that account.
On the eve of the TerraUSD price jumped to about 90 cents after falling to 61 cents, while Luna also recovered after falling.
The instability of bitcoin has limited its use for payments, so entrepreneurs have created stablecoins: cryptocurrencies pegged to assets such as the US dollar. But a recent study concludes the most popular stablecoin, tether, shows the need for transparency in a growing industry. Photo illustration: Sharon Shi / WSJ
Write Caitlin Ostroff at caitlin.ostroff@wsj.com and Elaine Yu at elaine.yu@wsj.com
Copyright © 2022 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8
