TerraUSD, also known as “UST”, is one of the largest by market cap, but unlike most major stablecoins that are backed by other assets, TerraUSD’s value is derived from complex algorithmic processes, linked to another paired token called Luna, which is free-floating.
TerraUSD broke its 1:1 relationship with the dollar this week, weighing on cryptocurrency markets already pressured by falling stocks, and continued its plunge on Wednesday when it touched 30 cents on the dollar, according to the Coingecko pricing website.
Do Kwon, co-founder of Terraform Labs, the company behind the token, announced a “recovery plan” in a series of tweets, saying the company would seek additional external funding and “rebuild” TerraUSD to be collateralized, i.e. that it is backed by reserves rather than relying on an algorithm to maintain its 1:1 parity with the dollar.
“A bailout was to be expected, and UST becoming essentially collateralized is the only outcome that makes sense,” said Joseph Edwards, head of financial strategy at crypto firm Solrise.
“The proposals are sensible, but they will do nothing without massive amounts of external capital.” Regulators have highlighted stablecoins as a potential threat to financial stability, but are divided on the size of the threat given that the global cryptocurrency market is relatively small.
Source: Ambito
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