Stablecoins discussion - Luna and Terra USD case study
TerraUSD and its sister currency Luna, collapsed earlier this month, generating a lively discussion about the real stability of stablecoins. A stablecoin is a cryptocurrency that is tied to another asset, a fiat currency, such as the US dollar or the euro. They're supposed to be more stable than other cryptocurrencies. Stablecoins serves as a bridge to the old financial system, operating as a money with a widely accepted value.
Some stablecoins rely on complex algorithms to maintain their peg to the US dollar. TerraUSD is one of these algorithmic stablecoins. It uses a complicated seesawing technique with a companion cryptocurrency called Terra Luna to try to retain the same value as the US dollar (or just Luna). While one TerraUSD is supposed to be worth exactly $1 at all times, the value of Luna can change. TerraUSD essentially uses Luna as a counterbalance to keep its dollar peg.
The biggest reason that most people held TerraUSD was because of the Anchor Protocol. It acted like a savings account for TerraUSD, but it pays 20% interest. But in March this year, Anchor passed a resolution to replace the 20% rate with a variable rate. Recently, large amounts of TerraUSD were withdrawn from Anchor, worrying traders and prompting them to sell their TerraUSD and Luna tokens.
People began to flee the scene by burning TerraUSD in exchange for Luna. Luna's supply exploded, leading the price to drop. Luna was pushed off the seesaw in a way - TerraUSD crashed, and so did Luna.
Therefore, people have been asking the question: how stable are stablecoins? Is there a solution for this problem?
We say yes - smart regulation. An adequate framework to guide regulation and supervision and mitigate the financial stability risks stemming from the crypto ecosystem.