The sale of cryptocurrency, which was supposed to be pegged to 1 dollar, accelerated on Wednesday, briefly raising its value by less than a quarter of that value.
According to CoinDesk, on Wednesday TerraUSD traded for only 23 cents. As of 5:15 a.m. ET, it has partially jumped to about 41 cents in volatile trading.
Stablecoin, this breed of cryptocurrency, has won the affection of traders for being the only part of the cryptoworld known for its stability. While the most popular stablecoins maintain their level with assets that include debt and cash in dollars, TerraUSD is what is known as an algorithmic stablecoin that relies on financial engineering to maintain its relationship with the dollar.
The TerraUSD peg broke last weekend with a series of major TerraUSD withdrawals from the Anchor Protocol, a kind of decentralized bank for crypto investors.
The Anchor Protocol is built on the technology of the same Terra blockchain network on which TerraUSD is based. This has been a major driver of stablecoin growth in recent months, allowing crypto-investors to earn almost 20% per annum by lending their TerraUSD holdings.
At the same time, TerraUSD was also sold for other stablecoins backed by traditional assets, through various liquidity pools that promote peg stability, as well as through cryptocurrency exchanges. The sudden outflow of money frightened some traders who started selling TerraUSD and its cognate token Luna. Before its peg was broken, TerraUSD was the third largest stablecoin with a total market value of $ 18 billion.
The sudden outflow of money in recent days has frightened some traders who have started selling TerraUSD and its cognate token Luna.
According to CoinDesk, the drop in TerraUSD to 23 cents around 3:30 a.m. Eastern Time marked a drop of 70% of its value 24 hours earlier. Luna briefly reached a low of $ 4.10 – a drop of 85% over the same period.
Stablecoins have grown in popularity over the past two years and now act as a lubricant that drives the gears of the cryptocurrency ecosystem. Traders prefer to buy coins such as bitcoin, ether and dodgecoin using digital assets pegged to the dollar because when they buy or sell, the price moves only on one side. They also allow for quick trading without settlement times related to currencies issued by the government, which can take several days.
The price of bitcoin rose to $ 31,336.50 on Wednesday, up 1.2% from 5pm on Tuesday. In the last week alone, it has lost about 21% of its value.
In the past, TerraUSD has maintained its price of $ 1, relying on traders who acted as its backing stopper. When it fell below the peg, traders “burned” the stablecoin, removing it from circulation, exchanging TerraUSD for new Luna units worth $ 1. This action reduced TerraUSD’s offer and raised its price.
Conversely, if the price of TerraUSD rose above $ 1, traders could burn Luna and create a new TerraUSD, thus increasing the supply of stablecoin and lowering its price back to $ 1.
Such a model has drawn criticism because it relies on the collective willingness of people to support cryptocurrency. Without this, stablecoin could quickly sink, which industry participants have described as a “death spiral”.
Martin Hisbeck, head of blockchain and crypto-research on the Uphold digital money platform, compared what is happening with TerraUSD and Luna, to a bank run. “People don’t trust me anymore, they run to the exit,” he said.
TerraUSD was created by Ko Kwon, a South Korean developer who also co-founded Luna Foundation Guard, a nonprofit that helps support and maintain TerraUSD.
Earlier this week, the fund said it had lent $ 750 million in bitcoins to trading firms to protect the stablecoin peg. Blockchain entries of the fund’s wallet show that it no longer stores bitcoin on that account.
On the eve of the TerraUSD price jumped to about 90 cents after falling to 61 cents, while Luna also recovered after falling.
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TerraUSD cryptocurrency is pledged by investors
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