In the crypto universe, the stablecoin market is in full swing. Why has the Terra USD fallen? What are the consequences on the market? decryption.
Panic winds in the stablecoin market. The collapse of the Terra USD (UST) stablecoin has impacted the stablecoin ecosystem, as well as cryptocurrencies. BFM Crypto takes stock.
• How does a stablecoin work?
A stablecoin (or stable cryptocurrency) is a crypto asset (or digital asset) that is pegged to a fiat currency such as the euro or dollar. A stablecoin can also be backed by other assets (such as gold). This is called the underlying asset of the stablecoin.
When the price of the underlying asset goes up or down, the value of the stablecoin must match. The promise is to maintain parity permanently, e.g. 1 UST = 1 dollar. This peg to a currency is also known as a “peg”. When there is a gap between the value of the underlying asset and that of the stablecoin, it is called a “de-peg” or “loss of parity”.
In particular, stablecoins, the most famous of which are USDT (from the company Tether) and USDC (from the companies Coinbase and Circle), seek to reduce the risk of volatility in the cryptocurrency market.
There are two main forms of stablecoins:
- The largest (so-called “classic”) stablecoins, which make up about 90% of stablecoin trading today, work like this: a company that issues the stablecoin (e.g. stable coins in circulation. So as a customer, dollar stablecoins are If you want to sell, there is certainly enough money in this company’s coffers to make this conversion, so it is a parity based on the supply of “real” money available to the stablecoin issuer.
- Other stablecoins, called “algorithmic”, operate with reserves placed in assets other than the underlying asset to which they are linked, such as digital assets. These algorithms should make it possible to maintain parity… At least in theory.
• What happened to Terra USD (UST)?
The UST (or Terra USD) is the third largest stablecoin in the world, with a capitalization at the time of writing of just over $7 billion. It is a so-called algorithmic stablecoin that works with the luna cryptocurrency and cryptographic algorithms. The complex architecture of the algorithms makes it possible, thanks to the Luna cryptocurrency and a basket of currencies, to keep the UST at one dollar, as financial analyst Laurent Pignot explained in an article published two days ago on BFM Crypto. .
However, in a context of a sharp decline in cryptocurrencies, and especially the luna, demand for sales was so strong on the latter that the UST algorithms failed to withstand this volatility shock. The Luna Foundation, which oversees the Terra blockchain, had meanwhile bought a supply of bitcoins to intervene in a problem: it mobilized the equivalent of 1.5 billion dollars in bitcoins to get the UST back on track, but that wasn’t enough.
To date, the price of the UST is around $0.50, it has even fallen to $0.22, with people preferring to sell these assets in a context of crisis.
“On the UST, I think the situation cannot be resolved for the people who held it. It’s hard to see how it could rise. who hope the UST returns to the 1 dollar point, this scenario seems to be off day by day as protocol burns these last reserves to try to restabilize the device,” explains BFM Crypto Valentin Demé, journalist at Cryptoast.
To save the UST, there are not many options: either the intervention of investment funds or billions of dollars in emergency aid.
• Why have classic stablecoins fallen?
In addition to the UST, there are other so-called “classic” stablecoins. These stablecoins must therefore guarantee that there are as many dollars in reserve as there are stablecoins in circulation.
However, this Thursday morning, the largest stablecoin, Tether (or USDT), fell below its 1:1 peg, with the dollar trading at $0.97. It has reverted to $0.99 at the time of writing. “We have rarely seen the USDT fall so low, but this is also explained by the collapse of the UST, people were afraid and preferred to sell other stablecoins,” Valentin Demé said. However, the stablecoin has risen, which can be explained by the current decline of bitcoin, with people preferring to exchange their bitcoins for stablecoins.
“Tether is now being watched closely because if it were to fall sharply, it would lead investors to sell to get US dollars back. The project could show its limits and derail the entire cryptocurrency market. criticized several times for not having as many US dollars as its capitalization, which is currently $81 billion. If all investors wanted to withdraw their money and the foundation didn’t have enough, it would cause serious liquidity problems,” said Vincent Boy, market analyst at IG France.
“This disaster scenario could remind us of the crash of 1929, when everyone wanted to withdraw their money from the banks, but didn’t have enough money in the coffers,” adds the latter.
• What are the implications for companies exposed to UST?
The collapse of the UST proves that the principle of algorithmic stablecoin has its limits: in particular, this explains why most major decentralized funding protocols, such as AAVE, do not allow depositing the UST as collateral. users could borrow UST, but not deposit it as collateral). This means that there will be no “liquidity crisis”, according to Valentin Demé.
However, other companies had chosen to expose themselves to the UST, especially those that offer crypto investment services. This is called staking services (loans of cryptos to the blockchain at interest) or lending (loans of cryptos to a borrower at interest), such as, for example, the French company Just Mining. Borrowing is “a validation mechanism that consists of immobilizing an amount of cryptocurrencies to earn interest,” Just Mining specifies on its site.
Just Mining has just been impacted by its lending industry, with the company being exposed to 30% of the luna blockchain to generate interest on the protocol, as part of its lending products. However, in decentralized finance, there are liquidated pools that allow the exchange of many stablecoins including UST, DAI, etc. When the UST fell, their holders sold so many that the liquidity pool became destabilized. This provided a higher-than-expected exposure to the UST, which rose from 30 to 40%. Just Mining insures its clients affected by potential losses of up to $1250.
Just Mining is not the only company involved in this scenario, all those who invest or lend cryptocurrencies may also need to communicate about the consequences of the collapse of the UST.
• What are the long-term consequences?
The collapse of the UST and the panic in the stablecoin market “allows us to purge the stablecoin market,” said Jonathan Herscovici, founder and boss of the French company StackinSat, registered as a digital asset service provider (PSAN) with the AMF . His company has chosen to only expose itself to bitcoin.
“Luna is dragging everyone into the carnage and it proves that all these highly advanced systems that produce huge yields are gas works that just cost people money. Their own makers don’t even know how it works anymore,” he explains.
According to the latter, algorithmic stablecoins can even resemble a Ponzi scheme, “with yield systems that are almost incomprehensible to humans. Anyone can understand what is behind the bitoin white paper so that it is complex on certain cryptocurrencies or stablecoins and the promise of return is not being met,” he adds.
To him, this situation also reveals a lack of financial education and understanding of how stablecoins or altcoins (other cryptocurrencies than bitcoin) work.
“Investing in cryptocurrencies should be traders whose job it is, otherwise it is almost impossible to understand what is behind the promises of returns of cryptocurrencies. It is very technical, very advanced, it should be almost forbidden for the average saver. Marketing messages are complicated promises to deliver,” emphasizes Jonathan Herscovici.
Inevitably, those who pay the price are the holders of cryptocurrencies, whose market has been falling for several days. This creates a strong sense of panic, as evidenced by the many posts by Luna cryptocurrency holders on Reddit.
For Jonathan Hercovici, the problem remains the same with classic stablecoins. “The company behind it can clearly go bankrupt, it’s the problem of centralization. A stablecoin should be stable, but in the end it isn’t, while a bitcoin is equal to a bitcoin,” the latter said.
Recall that the price of bitcoin has fallen by 50% since last November and peaked at $69,000 resulting in heavy losses for these holders, from individuals to crypto billionaires.
For several months now, many regulators have been calling for regulation of the cryptocurrency market and in particular that of stablecoins, which currently weighs $1473 billion for all crypto assets combined.