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TerraUSD crashed. What does this mean for other stablecoins? Here are the potential winners and losers

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It’s the third day since TerraUSD, an algorithmic stablecoin designed to trade 1 to 1 against the US dollar, broke down for a long time.

TerraUSD USTUSD,
+1.46%,
or UST, the 11th-largest cryptocurrency by market capitalization, fell to 23 cents on the dollar on Wednesday, before rebounding to 77 cents on Binance. LUNA, another cryptocurrency that backs the UST, lost more than 90% of its value in the past 24 hours, falling to $0.7 on Wednesday, according to data from CoinDesk.

Although Terra supporters said they approved of a community plan to save the stablecoin, it didn’t bring much comfort. As a sign of alarm, a dedicated forum for Terra-related discussions at Reddit included a post with international suicide prevention hotlines that was pinned by the moderator.

Some crypto industry participants said it was a “dark day” for the entire industry, as one of the most popular blockchains to grow at breakneck speed, saw the value of its coins almost collapse.

Investors are also keeping a close eye on what Terra’s downfall could mean for other stablecoins, which play an important role in the crypto ecosystem and account for around 13% of the crypto market capitalization.

A stablecoin is a type of cryptocurrency whose value is pegged to other assets, usually fiat currencies such as the US dollar. They are designed to maintain a stable price, which makes them popular when it comes to facilitating the trading, lending, and borrowing of other digital assets.

Explain : What is an algorithmic stablecoin? Why is Terra making headlines? Here’s what investors need to know.

Over the past few days, most other major stablecoins, including Tether USDTUSD,
-0.04%
and USD Coin USDCUSD,
,
have seen stable prices.

“The events of the past few days cannot be construed as an indictment of all stablecoins,” David Puth, CEO of Center, which provides technology for USD Coin, or USDC, wrote to MarketWatch via email. mail.

In fact, some traders believe that the fall of the UST will boost demand for other stablecoins in the near term, as investors transfer funds from the UST to its counterparts. “There is roughly $10 billion, if not more, of UST capital looking for safer stablecoins to park,” Grayscale research analyst Matt Maximo wrote to MarketWatch in an email.

Still, some investors are concerned that the fall of the UST could spark greater regulatory scrutiny of stablecoins. During a Tuesday hearing before the Senate Banking Committee, Treasury Secretary Janet Yellen said the Terra crash “just illustrates that this is a rapidly growing product and there are risks to financial stability and that we need an appropriate framework”.

Yellen also said it was “very appropriate” to draft stablecoin legislation this year.

Lily: Algorithmic stablecoins can be “inherently unstable”, says Senator Toomey after Terra episode

In November, the Biden administration called on Congress to quickly pass new legislation that would require stablecoins to be issued by insured banks overseen by federal banking regulators.

“Of course, long-term regulation is positive for the crypto space, but if stablecoin issuers are regulated as strictly as banks, it could stifle one of the most innovative, thriving and important sectors of the crypto market. crypto,” Anto Paroian, chief operating officer of crypto hedge fund ARK36 wrote to MarketWatch in email comments.

A Luna Foundation Guard representative did not immediately respond to an email seeking comment.

Winners, losers?

The fall of the UST has also intensified the divergence of views on the different types of stablecoins. Some proponents believe this shows the merits of reserve-backed stablecoins, such as Tether, USD Coin, and Pax Dollar, as they could offer more consumer protection. “There is a constant store of value and much less counterparty risk when using a fully collateralized stablecoin compared to an algorithmic instrument,” said Puth du Center.

Yet the largest stablecoin Tether has long been criticized for hold commercial paperbonds, loans and other digital tokens in its reserve.

Tether’s commercial paper holdings declined quarter over quarter, a company spokesperson wrote to MarketWatch. “Unlike these algorithmic stablecoins, Tether holds a strong, conservative, and liquid wallet comprised of cash and cash equivalents,” the spokesperson wrote. “We don’t think the UST situation means anything to the centralized stablecoin market. They are entirely different types of assets,” the spokesperson said.

Despite Terra’s plunge, some investors remain confident about DAI, another algorithmic stablecoin. Unlike Terra, MakerDAO, which supports DAI, requires 150% guarantee to hit DAI.

“MakerDAO is better protected against a sharp drop in the value of its crypto collateral overnight by having more collateral than DAIs in circulation,” Grayscale analysts wrote in a recent note. “The only caveat is that these are less efficient systems, therefore more difficult to scale,” said Corey Miller, head of growth at decentralized crypto exchange dYdX.

However, some stablecoins that operate similarly to UST have come under pressure.

The perpetual futures funding rate of TRX, a coin that backs the TRON blockchain’s USDD algorithmic stablecoin, has fallen deep into negative territory on Binance. Meanwhile, USDD, which is believed to trade one-to-one against US dollars, fell to 98 cents on crypto exchange Poloniex on Wednesday.

Justin Sun, founder of TRON, said on Twitter that the community will use $2 billion to maintain the price of the stablecoin.