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Stablecoins are cryptocurrencies that are usually pegged to a fiat currency, such as the dollar.
Back in May, the collapse of stablecoin “Terra Luna” wiped US$500 billion from the crypto market. So far in June 2022 nearly US$400 billion has left crypto as the industry market cap fell below US$1 trillion for the first time since January 2021. Many crypto investors may have thought that May 12 was the right time to buy the dip. Back then, the Bitcoin price has fallen from US$40,000 down to US$28,000. But if you’d bought at US$28,000, you’d be 30% down in your investment as the Bitcoin price barely held between US$20,000-US$19,000. But does this crash means the end for stablecoins? Let’s find out.
What really caused Terra’s stablecoin UST and Terra to crash?
Whether it was one giant whale or collusion between large hedge funds, someone appears to have bought up around US$1 billion worth of UST stablecoins, while shorting their Bitcoin holdings. Massive withdrawals were made from Anchor, decentralized finance (DeFi) protocol based on the Terra network. Deposits dove from US$14 billion to US$11.2 billion over just one weekend. The existing negative market sentiment combined with fresh FUD — fear, uncertainty, and doubt— led to the perfect conditions for a bunk run — people rushed to pull their money out.
Why Stablecoin era won’t end?
Stablecoins have the potential to offer the same level of mass blockchain adoption that NFTs offered Web3, but instead of consumers on OpenSea and Raible, these adapters will be institutions. Supply chains are increasingly global, and with the changing economic environment and rising interest rates, the world now more than ever needs cost-efficient means of settling instant B2B payments across borders — stablecoins can be a powerful solution.
The Stablecoin Potential
The increasing adoption of stablecoins could help popularize the use of cryptocurrencies as a medium of exchange for routine financial transactions, as well as for other applications. Such applications may include using stablecoins to trade goods and services over blockchain networks, in decentralized insurance solutions, derivatives contracts, financial applications like consumer loans, and prediction markets. A volatile cryptocurrency is not suitable for those purposes, since the volatility presents a risk of loss for parties to the transaction.
Every Stablecoin is unique
You read it right, just because some of the stablecoins failed miserably does not mean the entire concept of stablecoin is a failure. Many stablecoins are built on solid ground and are performing as expected.
Crash or raise in stablecoin, it is all because of its algorithm. These are coins that were never fit for purpose because they were built on insecure foundations. There were always critics: some called out Terra as a Ponzi scheme and argued that it, and other algorithmic coins, would only hold value if more and more people bought them.
Algorithmic stablecoins are unregulated and not backed by equivalent amounts of the underlying fiat currency — or by anything, for that matter. Instead, they deploy smart contracts to create or destroy the available supply of tokens to adjust the price. It’s a system that worked, backed by an artificially high interest-paying mechanism called Anchor, while enough people believed in it. Once that trust started to evaporate in early May, the floodgates opened in a classic, old-world bank run.
Tether vs USD Coin
Tether (USDT) and USD Coin (USDC) are the two biggest stablecoins in the industry. A year ago, first-mover Tether was unquestionably the market leader. But USD Coin is catching up and growing much faster than Tether. Notably, last month it overtook Tether on the Ethereum network. Stablecoins exist on various smart contract blockchains, including Ethereum (ETH), Avalanche (AVAX), Solana (SOL), Algorand (ALGO), and others. These cryptos tie their value to other commodities, such as the U.S. dollar or gold. For example, both USDT and USDC are pegged to the U.S. dollar.
USD Coin (USDC) is a stablecoin launched in 2018 by the Centre, which is a consortium created by Circle and Coinbase. USDC is an open-source protocol, which means anyone can use it — not just Circle and their partners. USDC along with tether (USDT) equates to more than 80% of total market capitalization for all U.S. dollar-pegged stablecoins. Though USDT has the largest market capitalization among all stablecoins, USDC has its advantages and differences from its peers.
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