On Thursday, May 12, the cryptocurrency market accelerated its fall as TerraUSD (UST), an algorithmic stablecoin meant to be pegged to the US dollar at 1:1, dropped in a moment to $0.3 and then bounced back up to $0.6.
First things first: there are two types of digital currencies. That's right, there are cryptocurrencies and stablecoins. Cryptocurrencies are notoriously known due to their extreme volatility. Stablecoins as a concept was designed to solve that problem.
And, just like with any tech in the blockchain world, there are two types of stablecoins: traditional stablecoins (e.g. USD Coin, Tether, Binance USD and so on) or the so-called algorithmic stablecoins (e.g. TerraUSD, USDD, Djed and so on).
Traditional stablecoins are "supposedly" backed by bonds, stocks and other securities. Algorithmic stablecoins are tied to the value of government-backed (crypto)currency. For instance, the TerraUSD stablecoin is backed by both cryptocurrencies: LUNA and BTC.
How big is this market?
The market of stablecoins accounts for about 12.5% of the entire cryptocurrency market capitalization, according to data from CoinMarketCap. The number might seem not so big given that the whole cryptocurrency market capitalization is over $1.2 trillion.
But, stablecoins remain one of the top streams for liquidity as other altcoins altcoins are still subject to volatility fluctuations.
So what's the problem?
For some reason, TerraUSD lost its peg over the weekend. Yeap, that's right, an algorithmic asset failed. In a moment, UST dropped to $0.3 and one of its backing currencies lost 99% of value. Terra Labs Terra Labs even tried to save UST by pledging $1.5 billion in bitcoin (BTC) and terra (LUNA) but that didn't work out well and the stablecoin accelerated its fall.
Later, the developers announced the 1164 proposal, which is expected to solve the problem of slow UST burning by implementing some technic changes in the code of the project. As of press time, there are about 63% of voters in favor of that change.
Was that the main reason behind bitcoin's crash?
Frankly, it's hard to tell. Bitcoin has indeed edged down to $25,302 on BitMEX amid all this mess, but you can notice that bitcoin's downtrend started way before the drama around UST and LUNA took place, if you take a look at the charts.
Did UST play its part in bitcoin's sell-off? Probably. Was the algorithmic stablecoin the main trigger behind the total market crash? It's up to you to decide.
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