Luna and Terra's stablecoin UST are both crashing: Here's a guide to tether, USD Coin, terra and other reserve-backed cryptocurrencies

Business Insider

May 11, 2022, 22:09 IST

Luna and Terra's stablecoin UST are both crashing: Here's a guide to tether, USD Coin, terra and other reserve-backed cryptocurrencies

Tether, USD Coin, and Dai are the three largest stablecoins by market capitalization, according to the price-tracking website CoinMarketCap.Muhammed Akan/Shutterstock

Stablecoins are cryptocurrencies whose value is pegged to a reserve asset like a fiat currency or gold.
They're supposed to offer investors an accessible entry and exit point into the crypto market without the volatility.

Terra's algorithmic stablecoin is the biggest story in crypto right now.

UST, which is supposed to be pegged to the dollar, has seen its price crater in recent days against a backdrop of significant volatility in the crypto market.

On Saturday, UST started to lose its peg to the dollar and the ecosystem's governance token LUNA, which plays a role in maintaining the stability of UST, fell 15% in 24 hours.

Having traded at around $80 on Friday, LUNA has since plunged 95% to $2.50. UST, which is supposed to trade at $1, is currently trading around $0.50, according to data from FTX.

Stablecoins derive their value from being pegged to another asset, which is supposed to make them much less volatile than other cryptocurrencies like bitcoin and ethereum. Some stablecoins, like UST, use a combination of algorithms and reserves to maintain the peg.

UST's plunge could potentially provide ammunition for stablecoin critics. Back in September, Securities and Exchange Commission chair Gary Gensler compared stablecoins to casino "poker chips".

Insider has compiled a guide of our stories on the largest stablecoins, the key players in the market, and Terra's crash below.

So, why is Terra's UST crashing?

The algorithmic stablecoin UST uses a burning mechanism and a reserve of digital assets, such as bitcoin, to maintain its peg to the dollar.

Some crypto investors love the concept of algorithmic stablecoins, because using an algorithm to maintain the peg keeps the asset outside the scope of regulators and governments. Others hate them, because it's a complex process to maintain the crypto asset's price stability.

Read more: Algorithmic stablecoin UST has struggled to maintain its peg amid the crypto crash. We spoke to 6 crypto-investing heavyweights who are sounding the alarm on the project — and one who's making a bull case.

Read more: TerraUSD stablecoin plunges to $0.30 as traders warn of 'death spiral' and investors await rescue plan

Read more: A crypto trading behemoth lays out how UST remains a 'material tail risk' that could continue to send prices falling through a 3-part self-destructive cycle — and 2 ways its positioning for further volatility ahead of a key market event

UST isn't the only stablecoin, right?

Terra's UST is one of many publicly-listed stablecoins. The two largest by market capitalization are tether (USDT) and circle (USDC), which are allegedly backed by fiat reserves, although tether has faced significant scrutiny after an investigation found it had overstated its US dollar backing.

Some stablecoins are backed by other fiat currencies, or by precious metals like gold and silver.

Read more: Tether's tech chief shares his expectations for crypto regulation as Evergrande's debt crisis spotlights the quality of assets in stablecoins' reserves

Read more: The Circle founder Jeremy Allaire explains why he thinks bitcoin will eventually surpass gold to hit $1 million — and charts his route to testifying before Congress last year as one of crypto's 'grown-ups'

Read more: The founder of a gold-backed cryptocurrency breaks down why now is the perfect time for investors to buy stablecoins - and explains his prediction that inflation could become "even worse than the 1970s"