Raynor de Best
Research expert covering finance, insurance & real-estate, internet & e-commerce
Get in touch with us nowTerraUSD and LUNA: The collapse of an algorithmic stablecoin
Stablecoins can be backed by a real-world asset – often tied to one of the world’s most used foreign exchange currencies – or a crypto asset, like a popular cryptocurrency. Some stablecoin, however, do things differently. TerraUSD (UST), for instance, had little to no backing but used a sister cryptocurrency, Terra (LUNA), to keep its price stable. Unlike Bitcoin, of which there can be a fixed maximum of 21 million tokens, UST had an algorithm that could "burn" (permanently destroy) LUNA to create more UST instead. Put simply: The system allowed one asset – UST - to be kept stable by people showing faith in the other - LUNA. In May 2022, this trust collapsed as many investors started selling their coins in favor of safer investments. Consequently, the prices of both LUNA and TerraUSD fell. This had a severe impact on the market size of Decentralized Finance (DeFi), losing billions of its value in only a few days.The future of digital payments?
In April 2022, the HM Treasury of the United Kingdom (UK) announced plans to regulate stablecoin in the future, so that it could become part of retail payments. Such a move would turn stablecoins into something like – but still different from – Central Bank Digital Currencies (CBDC), digital versions of real-world fiat currencies that are issued by a national authority. Up until 2020, several countries were researching such CBDC options. Advocates of this trend observe that it may lower the bar in several countries to start using financial services. Opponents, however, note that stablecoins are not designed for day-to-day payments, especially given the lengthy transaction times of cryptocurrencies. Consumers did reply in early 2022 they had certain segments in mind where they would like to see cryptocurrency payments in the future.
