In a week that has been merciless for cryptocurrencies in general, the Terra project has had a difficult few days.
The TerraUSD (UST) stablecoin, which is supposed to have a dollar peg, has decoupled considerably from the $1 mark in recent days, dropping to a low of less than 30 cents on May 10th. The ailing project put its whole blockchain on hold for about two hours on Thursday, locking user payments until the system was unpaused, according to the newest update to the drama.
It’s a harsh penalty, especially given cryptocurrency’s focus on decentralization. “We’ve seen hard forks before,” Ronghui Gu, CEO and creator of blockchain security startup CertiK, stated.
The instability has been compounded by a precipitous drop in the stock market, which has seen $200 billion in worth vanish in a single day. On the morning of May 12th, Bitcoin plummeted below $25,000, a level not seen since December 2020 and less than half of its peak in November 2021. Other cryptocurrencies have been hit hard in recent days, with Ethereum losing over 20% of its value in only 24 hours.
Terra’s issues started on May 9th, when the UST stablecoin’s price began to plummet. Due to the way algorithmic stablecoins work, this resulted in a massive rise in the supply of the associated Luna cryptocurrency token, which is traded against UST to keep the price stable.
Previously, just adding or subtracting Luna tokens from circulation was enough to keep the UST price stable. However, the magnitude of the price drop and the resulting increase in Luna supply – supply more than quadrupled in a matter of days — put the two connected cryptocurrencies into a “death spiral” from which neither has been able to recover.
UST is currently selling at roughly 40 cents instead of $1, while Luna’s value has nearly vanished, plummeting from $100 to around 1 penny.
Terra’s horror week demonstrates that stablecoins, which are supposed to have a set price, may be heavily influenced by larger cryptocurrency market movements – and can also influence those fluctuations.
Nonetheless, the sharp dip serves as a warning that most stablecoin economics are still in their early stages. “There are fiat-backed stablecoins,” Gu explained, “but people think that’s too basic — in the web3 and blockchain era, people want to come up with great, innovative concepts and inventions.” “That is why there is so much study into whether it is feasible to build a stablecoin using algorithms, but there are no entirely compelling answers yet.”
Terra’s future is unknown, however the enormous amount of unredeemed Terra coins poses a significant challenge to the initiative. As more coin holders try to cash out, the number of Luna tokens will likely plummet even more, triggering a “death spiral,” according to Bloomberg’s Matt Levine.
Gu, on the other hand, is cautiously hopeful about the future of stablecoins. “The crash demonstrates that people have overestimated what blockchain and web3 can do in a short period of time,” he argues, “but they continue to underestimate what can be accomplished in five or 10 years.”