What Is A Stablecoin?

You’ve heard it, I’ve heard it — the news that is taking the crypto world by storm…The annihilation of the Terra ecosystem LUNA coin and its intertwined TerraUSD (UST) ‘stablecoin’.

UST, which was equal to $1 (USD) just a few days ago, has since fallen to a staggering low of 8 cents. Then there’s LUNA, the centerpiece of Terra’s ecosystem. Valued ~$80 on May 7, Its value has collapsed down to a mere 0.004 cents in one of the most stunning crypto crashes ever recorded.

‘Algorithmic stablecoin’, ‘lost its peg’, these are the buzzwords that are currently flying around left, right and center in the crypto world — it seems every man and his dog has an opinion on the matter, but what the actual hell do these words even mean?

That’s what we’ll be looking at today in this article — to uncover the cause behind the monumental LUNA crash that has seen it drop in over 99.9% of its value.

The devil is in the detail. To understand what happened, we need to understand two important points.
(i) firstly, what is a stablecoin?
(ii) And secondly, what are the ‘pegging mechanics’ behind a stablecoin?

In its most simplest form, a stablecoin is a cryptocurrency that is supposed to be ‘pegged’ to fiat currencies, the US dollar for instance. For all intensive purposes, the term ‘peg’ means that the value of the stablecoin should match exactly the price of a fiat currency at all times. So in the case of a USD-pegged stablecoin, the price of the pegged cryptocurrency should match exactly $1 USD at all times.

Stablecoins are integral parts of “DeFi” (decentralized finance), designed to be ways for investors to safeguard themselves against the volatility of the cryptocurrency market. Say for example the price of Bitcoin (BTC) is $30,000 USD, a trader could exchange one BTC for $30,000 worth of a stablecoin. If tomorrow BTC drops 50% to $15,000, those $30,000 worth of a stablecoin could be exchanged for two BTC, since the stablecoin is designed to retain its $30,000 value. So the benefit of…

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