How TerraUSD, a Digital Token Designed to be Stable, Fueled a Crypto Crash


Bitcoin

and other cryptocurrencies went from bad to worse as selling pressure spread across the tech landscape. But the latest crypto crash was also fueled by stablecoins, a type of token that’s supposed to hold up when everything else tanks.

Stablecoins are designed to maintain a fixed value, typically at $1 per token. But a fast-growing “algorithmic” stablecoin called


TerraUSD

collapsed this past week to a few pennies on the dollar. That appears to have shaken confidence in the largest stablecoin, Tether. Prices for Tether, or USDT, dipped to 95 cents for a few hours on Thursday, then rebounded to nearly a dollar.

The episode could shake the foundations of crypto. Stablecoins are the bedrock of trading and lending activities, providing liquidity to individual traders, funds, and market makers on both centralized exchanges and decentralized-finance, or DeFi, networks. More than 90% of trading volume in crypto occurs in stablecoins, according to CoinMarketCap. Without stablecoins doing their job—holding their dollar pegs through periods of extreme turmoil—the crypto market may face a loss of confidence, affecting trading activity and prices for tokens ranging from Bitcoin to Dogecoin.

“USDT de-pegging is alarming for all cryptocurrency markets,” says Clara Medalie, research director at Kaiko, a crypto data firm.

This isn’t just a concern for traders and firms in the $1.3 trillion crypto market. Regulators worry that if stablecoins take off as privately issued digital money, they could pose risks to broader markets and monetary policies. A run on a stablecoin could, in theory, lead to heavy selling in assets held as reserves for coin issuers, such as commercial short-term debt. Stablecoins could also substitute for the dollar in international commerce and cross-border payments—making it harder for governments to keep tabs on monetary policies and capital flows.

“The outstanding…

Read more at www.barrons.com

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