StableCoins: The Search for Stability in the Cryptocurrency Market

Crypto's secure and straight-forward cousin stablecoins are clearly looking daisy. Tether, USDC and others lost their precious peg to the dollar in a market catastrophe last week, which shook confidence in these coins designed to offset crypto volatility. But is it a lonely outburst or is he losing his soul? According to data supplier Coinmarketcap, the major stablecoins rallied around $0.95 and $1.02 last week, having previously maintained their pegs within 20 cents. Although this is not the first time he has vibrated. According to Coinmarketcap, both Tether and USDC – the two largest – have experienced low hype volatility over the past years, sometimes rising to $1.01 in 2021 and around 97 cents in 2020.

Why did the value of stablecoins fall?

Unlike stablecoin Tether, TeraUSD, the third largest stablecoin by market capitalization, has no reserves to support its value. It relies on another cryptocurrency called Luna to maintain its value. When the value of a certain coin is less than $1. A trader can burn TeraUSD and get a similar Luna. Similarly, if TeraUSD exceeds $1, buyers can burn Luna and receive the same amount on TeraUSD.

These transactions actively control supply and demand, preventing the currency from moving too far from its initial peg. The system relies heavily on traders and stakeholders to deal with excessive deviations from the peg. Investors have invested nearly $14 billion in TeraUSD on Anchor Protocol, the lending and lending protocol of the founder of Terra. However, as soon as Tera collapsed, depositors on Anchor withdrew their TeraUSD and the price fell further without any support. The price did not return to the predicted level, and both TeraUSD and Luna lost their value. Terra's founder, Do Quan, tried to garner support for the coin on Twitter, but he could not, and the token continued its downward spiral.

Yet such a revolution can have winners and losers, even among stablecoins. According to Coinmarketcap, Tether's market cap fell from $83 billion last Monday to $75.6 billion, rising from $48 billion before the dollar dissolution to $51 billion. “They have more confidence in USDC because they have USDC reserves like BlackRock,” said Marcus Sotirio, analyst at UK-based digital asset broker GlobalBlack. Meanwhile Rook and the others see more control along the way. “Stablecoins are a low-hanging fruit, and I think we are going to see some policies for them,” said Michelle Bond, CEO of the Digital Property Markets Association. “There are so many different issues – what are acceptable reserves? Who can issue stablecoins? How should auditors and accountants be booked? What kinds of disclosures are made to clients?”