Was Terra’s UST cataclysm the canary in the algorithmic stablecoin coal mine?
The past week has not been an easy one. After the collapse of the third-largest stablecoin (UST) and what used to be the second largest blockchain after Ethereum (Terra), the de-peg contagion seems be spreading wider.
While UST has completely de-pegged from dollar, trading at sub $0.1 at the time of writing, other stablecoins also experienced a short period where they also lost their dollar peg due to the market-wide panic.
Tether’s USDT stablecoin saw a brief devaluation from $1 to $0.95 at the lowest point in May. 12.
FRAX and FEI had a similar drop to $0.97 in May. 12; while Abracadabra Money’s MIM and Liquity’s LUSD dropped to $0.98.
Although it is common for stablecoins to fluctuate in a very narrow range around the $1 peg, these recent trading levels are only seen during extremely stressed market conditions. The question that now sits in the mind of investors is will the fear spread even wider and will another stablecoin de-peg?
Let’s take a look at the mechanism of some of the major stablecoins and how they are currently traded in the Curve Finance liquidity pool.
The main purpose of stablecoins is to preserve a stable value and provide investors an avenue to park their money when volatility from other crypto assets are much higher.
There are two distinct mechanisms in stablecoins — asset-backed and algorithm-based. Asset-backed stablecoins are the most common version and issuers purport to back stablecoins with fiat currency or other cryptocurrencies. Algorithm-based stablecoins on the contrary seek to use algorithms to increase or decrease the supply of stablecoins based on market demand.
USDC, DAI and USDT are the most traded asset-backed stablecoins. Although they are all over-collateralised by fiat reserves and
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