TerraUSD, also known as UST, is a so-called algorithmic stablecoin. The value of this cryptocurrency is derived by complex processes and is linked to another, paired currency called the moon, which is free-floating. It was one of the largest in terms of market capitalization, but this week its peg to the US dollar collapsed and fell below $ 0.70 on Tuesday morning.
On Wednesday, the price fell to 0.30 USD. According to the CoinMarketCap website, Luna has fallen by 83 percent in the last 24 hours. TerraUSD now has a market value of about $ 7.7 billion, before the fall it reached $ 18.4 billion.
However, the wider cryptocurrency market has so far shown little sign of confusion. Major currencies such as bitcoin and ethereum are trading without major changes and stablecoin tether is sticking to its fixations.
The collapse of the digital currency terraUSD has rekindled the debate over algorithmic stablecoins. Over the weekend, the currency lost its intended peg to the US dollar and fell to about 99 cents. A wave of sales followed, weakening to 60 cents on Monday night. On Tuesday, after Kwon’s tweet, it was close to announcing a recovery plan, but it strengthened to about 94 cents.
“The market is now showing a clear lack of confidence in the ship’s ability to get right,” said Mati Greenspan, CEO of Quantum Economics.
Combination of equations and active trading
Unlike conventional stabilizations such as tether or USDC, which are backed by real and highly liquid cash equivalents or dollars, algorithmic tokens are designed to maintain fixation and investor confidence through a combination of mathematical equations and active trading.
In the case of UST, investors can exchange a token unit, no matter what the price is currently being traded, for one dollar worth the moon. According to the theory, the embedded arbitration business is supposed to help keep the UST close to the value of one dollar.