Earth, the Titanic of cryptocurrencies: when an unsinkable stablecoin sinks

One of the most popular projects of the blockchain industry, whose algorithm promised stability to the cryptocurrency, is suffering a severe financial hemorrhage. A debacle that also interferes with the price of bitcoin. To analyze.

Necessarily. A stablecoin that loses its balance and sees its price plummet by 35% is worth the deviation. To refresh your memory, let’s immediately remember that these so-called cryptocurrencies stable rely on all kinds of technical and financial mechanisms to ensure that their price does not fluctuate (too much) with the market.

Often, these digital tokens find their basis by pegging their value to a classic asset or currency, the US dollar not to mention it. For a purchased stablecoin, the user expects a greenback to be found in the cryptocurrency developer accounts.

We then come to the stablecoin Terra (UST) in connection with the blockchain of the same name. The FSO is developed in indirect parity with the dollar through an algorithm that integrates the native Earth token, the LUNA. Simply put, to create a MOON you need a UST and vice versa. The protocol provides for arbitration to keep the price as close to $ 1 as possible.

Thanks to the decentralized ecosystem, the FSO was until recently the third stablecoin in terms of market capitalization. Except this Tuesday, its price bottomed out at $ 0.65 on some trading platforms.

panic movement

Earth started shaking last weekend under the impact of massive liquidations. A phenomenon of UST “panic selling” simultaneous with large withdrawals on Anchor, a protocol developed on the Terra blockchain.

Anchor provides decentralized lending services to fintech companies as well agriculture (passive income in exchange for the immobilization of its cryptocurrencies on a platform). The treasure of the cryptocurrency industry, Anchor claims an annual return of up to 19.5% (!) On blocked deposits. Which recently earned it three quarters of the UST in circulation.

Investors looking for rewarding investments naturally flocked to this double-digit yield platform and needed stablecoins to take advantage of it.

Critics were quick to point out Anchor’s unsustainability – the interest income on the loans couldn’t cover the payment of the yields, so the whole system would be built on trust. In other words, if investors lose confidence, an inexorable downward spiral ensues.

Loss of faith in Anchor rhymes with losses for the stablecoin Terra. And viceversa…

An impractical market theory?

Market momentum theoretically helps keep the price of a stablecoin in balance. When the price drops by a few cents, investors usually take the opportunity to buy it at a discount and immediately resell it for a dollar apiece.

But given the current fall in the cryptocurrency market, officials from the FSO, Singapore’s nonprofit Luna Foundation Guard, feared to see their algorithm overwhelmed by trading volumes and their stablecoin swept away by the ebbing tide. .

The managers had therefore disbursed loans of $ 1.5 billion in FSO and bitcoin (28,205 BTC!) To ensure parity with the dollar. The remedy didn’t seem effective right away, but the gap is narrowing at the time of writing. The FSO is trading at 90 cents. Keep on.

Meanwhile, with bitcoin already under pressure from investors fleeing risky assets, BTC’s ploy to keep Earth afloat has plausibly exacerbated the largest drop in the price of the cryptocurrency (returning to last summer’s low point, not far away). from $ 30,000). A bit like an emerging country that sells its gold reserves to control the exchange rate of its national currency.

Watch out for the stablecoin crash

The collapse of the FSO would impact all decentralized finance (DeFi) and send a giant wake-up call to regulators, who are already very concerned about the risks to individuals.

Ironically, the Fed, the US central bank, released a financial stability report on Monday identifying the “vulnerabilities” of stablecoins and their systemic risks.

This category of so-called stablecoin digital currencies has seen strong growth, weighing in at nearly $ 200 billion. The United States is watching them closely to understand their full potential to address the challenges and frictions in cross-border remittances and payments. President Joe Biden presented an executive order last March paving the way for “responsible development of digital assets”.

However, the Fed is concerned about the concentration of this sector and the assets on which stablecoins are guaranteed. ” Assets that can lose value or become illiquid in a crisis “, say the speakers. ” These vulnerabilities can be exacerbated by a lack of transparency about risk.

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