Conversations in the crypto world has centered around stablecoins this week as their touted stability is questioned.
What used to be one of the largest stablecoins, TerraUSD (UST), fell out of favor after falling from its $1 value on Monday and has since fallen a staggering 70% to $0.2998, when it was never intended to decline. deviate from the dollar equivalent value. Its founder, Do Kwon, unveiled a plan to rescue his stablecoin, but concerns from community members remain.
Meanwhile, US Treasury Secretary Janet Yellen pushed for more stablecoin regulation during an annual testimony before the Senate Banking Committee on Tuesday amid UST as it struggled to maintain its peg.
“This UST situation could give governments, such as the US, an excuse to crack down on stablecoins even harder,” George Harrap, co-founder of the Solana-focused portfolio dashboard Step Finance, told Marketingwithanoy. “We’ve seen this before; however, stablecoins have received a lot of attention from the regulatory authorities, and this is likely to see that increase. †
Amid a crypto market ravaged by bearish sentiment, an important question arises: What does all this mean for the future of stablecoins?
Some industry participants are not concerned. “I would say that this UST situation will not affect stablecoins as a fundamental proposition,” Jon Wood, a contributor to the decentralized finance (DeFi) revenue protocol Harvest Finance, told Marketingwithanoy. “Stablecoins are such an important part of the crypto ecosystem and it is impossible to do DeFi without them. The big ones have been around long enough to be widely used and trusted.”
“The recent collapse of the UST was a massive collapse, but it certainly wasn’t the first or the only one.” Evan Kuo
Stablecoins, by their literal definition, are intended to be stable at a 1:1 ratio against external currencies, such as the US dollar. But not all stablecoins are built on the same foundations and can be backed by different reserves. For example, the two largest stablecoins by market capitalization, Tether (USDT) and USD Coin (USDC), are backed by fiat equivalent reserves issued by centralized companies.
Meanwhile, UST is an algorithmic stablecoin mainly backed by its sister cryptocurrency, LUNA, but was also backed by bitcoin. Founder Do Kwon previously told Marketingwithanoy that there were plans to support it with other cryptocurrencies over time. It’s unclear if that roadmap is still in place for UST as it tries to recover from its demise.
A spokesperson for Kwon declined to comment on Wednesday, saying Terraform Labs is “currently on hiatus with media opps because they’re kind of down right now.”
“Of course there have been teething problems; Tether has had its problems with collateral ratio doubts, but it’s still widely used,” Wood said. “USDC is criticized for being centralized. Maker’s DAI over-collateralized algo-stable was considered too ‘niche’, but has been functioning at its peak for years. They’re all going nowhere.”