The earth is collapsing, taking the moon with it, or it may be the other way around. Either way, cryptocurrency enthusiasts who bet on the token pair TerraUSD (UST) and Terra (LUNA) are in a cold sweat today as the two digital assets have unscrewed and lost a significant chunk of their value to starting May 6. If the fluctuation of the Luna is not unprecedented, that of the UST is more troublesome: this cryptocurrency was indeed presented as a “stablecoin”, a category of digital assets designed to ensure a stable price, generally indexed to another value. But the UST is not a stablecoin like the others.
A stablecoin that was not one.
Let’s first go back to the concept of “stablecoin”: these cryptocurrencies aim to guarantee their owner some protection against price volatility, generally by backing them with an asset or a classic fiat currency. A frequently cited example of a stablecoin is Tether, a cryptocurrency issued by the Hong Kong company Tether Limited and whose promise is that for each Tether token issued on its blockchain, a dollar is put in reserve in an account held by Tether. Limited. The objective of the maneuver: to ensure parity between the value of Tether and that of the dollar, and allow holders of Tether to be able to exchange them for dollars without worrying about price volatility.
“This type of cryptocurrency is particularly useful for investors looking for a fallback solution to deal with price variations,” explains Émilien Ercolani, co-founder of Maestria Blockchain. Rather than leaving their investments on a blockchain subject to significant speculation like that of Bitcoin or Ether, investors may be tempted to store their earnings on a “stablecoin” with the assurance that the value of this will be indexed to another asset considered more stable.
But we can distinguish several types of stablecoins: some, like Tether, choose fiat currencies like the dollar to guarantee the value of their digital asset. Others choose to index the value of their token to that of another cryptocurrency, such as DAI, backed by Ethereum. Here too, the objective is to guarantee a token of stable value, each unit can be exchanged for 1 dollar, but here the mechanism to ensure parity is the purchase or resale of the tokens issued by the ethereum blockchain. .
But the UST and the LUNA do not belong to these two categories: these two tokens are the two sides of another model of stablecoins, called “algorithmic stablecoin”. Issued by the Korean company Terraforms Labs, these two tokens aim to offer a speculative asset (the Luna) used to ensure the equilibrium value of a stablecoin (the UST). Unlike other stablecoins, the UST is not directly backed by another value, but by the Luna token and therefore aimed for an indirect parity with the dollar via the Luna token.
A smart contract, registered in the blockchain, made it possible to ensure a stable value for the UST: when the value of the token exceeded that of the dollar, the mechanism planned to dilute its value by issuing more tokens. Conversely, if the price is down, the algorithm will automatically “burn” money, i.e. remove certain tokens from circulation, to artificially raise the price of the token.
surprise fall
But not everything went as planned for the UST and the Luna. At the beginning of May, the values of the UST and the Luna began to fall. According to Coinmarketcap, the UST was trading at $0.1448 per unit at the time of writing this article, a steep drop for a token whose unit value was supposed to stabilize around one dollar. Its safe haven, the Luna, is also in free fall and is trading for 0.00002857 dollars per unit.
A real debacle for this project which had enjoyed great popularity from the summer of 2021 and which has since been frequently cited in the main cryptocurrencies to watch. The reasons for this resounding crash are currently unclear, but as Numerama points out, large withdrawals of funds have taken place on a decentralized finance protocol based on the blockchain of the UST and the Luna, in parallel significant sales of UST that contributed to its value falling.