The recent collapse of cryptocurrencies, which has wiped out billions of dollars from the market, has been caused in large part by the fall of a controversial ‘stable coin’ or stablecoin known as TerraUSD or UST, which is supposed to be pegged one to one with the US dollar.
However, it has lost its peg and was trading at about 14 cents on Friday, according to data from CoinGecko. Luna, a token closely associated with UST, is now worth $0 as a result.
UST and Luna are linked. UST is called an algorithmic stablecoin, which means that its $1 value is supposedly governed by internal code. This is fundamentally different than other stablecoins like Tether and USDC, which are backed by real-world assets like bonds. UST has no real-world reservations.
The UST algorithm works through a complex system of minting and burning tokens to maintain price stability. A UST token is created by destroying part of the cryptocurrency related to it (Luna) to maintain parity with the dollar.
But the extreme volatility of the market has put UST to the test and it has been unable to maintain parity.
Furthermore, the fact that the Terra blockchain, on which UST and Luna are based, has twice stopped processing transactions in less than 24 hours, further complicating the situation.
“All asset classes except commodities have been dragged down by a sharp sell-off. Risk aversion soared as the Federal Reserve stepped up its tightening monetary policy by raising interest rates on the back of inflation and tightened financial conditions Bitcoin (BTC) decline started earlier (six months), was deeper (-60% from $69,000), but made significantly worse by ongoing contagion from stablecoin UST/USD, although it is also the less surprising (it’s the 10th crash of the decade),” said Ben Laidler, global markets strategist at eToro.
According to some analysts, these decreases are explained by the high levels of inflation in the United States and by the tightening of the monetary policies of the central banks. All in all, Bitcoin and Ethereum are the ones that endure the most, since other less popular ones, such as Polkadot or Cardano, leave 80%. In addition, Bitcoin’s fall exceeds 61% losses from the all-time highs it reached on November 10, 2021, when it reached $68,991. In social networks, experts speak of “collapse”, while some investors in these currencies expect a rebound effect and ask that it be ‘hold’, that is, not to sell.
The fall does not seem to be exclusive to cryptocurrencies: a similar message could come from the global economy if we take a look at the big technology companies, whose shares on the stock market have also lost a lot of ground since reaching all-time highs a few months ago.
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Source: Ambito
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