Stabilising stablecoins: What can we learn from the collapse of TerraUSD?

Note that stablecoin issuers must maintain a reserve that is equal or even greater in value to the number of coins in circulation. A stablecoin is a type of cryptocurrency whose value is pegged to something like the US dollar or gold. What it is pegged to can vary, but the idea is that by linking the value of the digital asset to something else the price will be more stable than the price of other types of crypto. Stablecoins are typically pegged to a currency or a commodity like gold, and they use different mechanisms to maintain their price peg. The two most common methods are to maintain a pool of reserve assets as collateral or use an algorithmic formula to control the supply of a coin.

Indeed,Yahoo Financereports that, as of 24 November 2022, USD Coin’s total market cap stood at around $43.8 billion. Yahoo Financereports that Dai’s market cap was $5.7 billion as of 24 November 2022. The pick of the bunch is probably PAX Gold by Paxos, a heavily regulated crypto entity who also issues USD Paxos . Enhance or build your brokerage business from scratch with our advanced and flexible trading platform, CRM, and a wide range of custom solutions. There is a geopolitical dimension as a CBDC comes with its own payment infrastructure.

The risks and pitfalls of stablecoins

A user can become a liquidity provider for a pair that includes a stablecoin on a DEX and earn a share of the fees paid to facilitate trades between the pair. Crypto’s total market capitalisation can rise and fall by billions of dollars a day. Even the top cryptocurrency—Bitcoin—is subject to significant fluctuations in value.

That type of scenario would of course have an impact on the wider financial system. To counter this risk, MiCA requires stablecoin issuers to hold 2% of equity (3% for significant issuers) and to draw up a ‘recovery plan’. Regulatory capital is usually designed to handle credit risk, which is minimal in stablecoins, whereas it does little to counter liquidity risk. The recovery plan should set up actions and procedures to ensure the resilience of the issuer should the situation quickly deteriorate. These procedures may include redemption fees and the temporary suspension of redemption.

Programmable money

Sparked by a massive drop in the value of the https://www.tokenexus.com/ markets overall, investors lost faith resulting in a mass sell-off in the TerraUSD stablecoin. Luna Foundation Guard tried to stop this slide by liquidating part of its 10 billion Bitcoin holdings. In this blog I want to highlight why TerraUSD, also calle UST, dropped below its target value, what the risks are of the various stablecoins, how regulators should react and what investors can learn from the crash of TerraUSD. We have ascertained that regulators are concerned about the potential spillover risks that stablecoins pose to the wider financial system.

There is no fixed supply since the number of tokens issued will ultimately be determined by the demand. Digital signs (hereinafter referred to as “tokens”) are not legal tender and are not required to be accepted as a means of payment. The material provided on this website is for information purposes only and should not be regarded as investment research or investment advice.

USD Coin

Since the what is a stablecoin space tends to be more volatile than traditional fiat currencies, crypto-backed stablecoins will tend to keep an over-collateralized position by keeping a larger reserve of the stablecoin’s backed cryptocurrency. However, stablecoins backed by fiat currencies must undergo regular proof of reserve audits. These audits ensure transparency for stablecoin issuers, crypto exchanges, and financial institutions. The developer of the stablecoin uses a similar process to peg the coin.