Cryptocurrency sell-off believed to have been pegged at $1 accelerated on Wednesday, quickly bringing its price below a quarter of that value.
TerraUSD traded as low as 23 cents on Wednesday, according to data from CoinDesk. At around 5 p.m. ET, it partially recovered to around 67 cents in volatile trading.
A stablecoin, this cryptocurrency has gained favor among traders for being part of the crypto universe known for its stability. While the most popular stablecoins maintain their level with assets including debt and dollar cash, TerraUSD is known as an algorithmically stable coin that relies on financial engineering to sustain linked to the dollar.
The TerraUSD peg breakout began over the weekend with a series of large TerraUSD withdrawals from Anchor Protocol, a type of decentralized banking for crypto investors.
Anchor Protocol is built on the technology of the same Terra blockchain network that TerraUSD is based on. It has been a major factor in the growth of stablecoins in recent months by allowing crypto investors to earn returns of almost 20% annually by lending out their TerraUSD holdings.
At the same time, TerraUSD has also been sold for other stablecoins backed by traditional assets through various liquidity pools that contribute to the stability of the exchange rate, as well as through cryptocurrency exchanges. The sudden outflow of money has caused some traders to start selling TerraUSD and its sister token in shock and fear. Before its peg was broken, TerraUSD was the third largest stablecoin, with a total market value of $18 billion.
TerraUSD’s drop to 23 cents at around 3:30 a.m. ET marks a 70% drop from its value 24 hours earlier, according to CoinDesk.
Even as TerraUSD started to regain some value after hitting the low, Luna continued to fall. The token is down about 95% from 24 hours ago at around 5pm ET, trading at $1.16.
“I understand that the past 72 hours have been extremely difficult for all of you – know that I am determined to work with all of you to get through this crisis and we will build a path out of it. hey,” writes South Korean developer Do Kwon, creator of TerraUSD, on Twitter on Wednesday.
Stablecoins have grown in popularity over the past two years and now serve as a lubricant that moves the gears of the cryptocurrency ecosystem. Traders like to buy currencies like bitcoin, ether, and dogecoin using digital assets pegged to the dollar because when they buy or sell, the price only moves in one direction. They also allow for fast transactions with no settlement time associated with government-issued currency, which can take days.
The bitcoin price fell to $28,314.54 on Wednesday, down 8.5% from the ET level at 5pm on Tuesday. It has lost about 28% of its value in the past 7 days. It has lost about 24% of its value in this week.
Previously, TerraUSD maintained its $1 price by relying on traders as its fulcrum. When it falls below the peg, traders will burn the stablecoin – removing it from circulation – by exchanging TerraUSD for $1 worth of new Luna units. That action reduced the supply of TerraUSD and increased its price.
Conversely, when the value of TerraUSD rises above $1, traders can burn Luna and create new TerraUSD, thereby increasing the stablecoin supply and reducing its price back to $1.
Such a model has been criticized because it is based on the collective willingness of people to support cryptocurrencies. Without that, stablecoins could sink quickly, in what industry participants have described as a “spiral of death.”
Martin Hiesboeck, head of blockchain and crypto research at digital currency platform Uphold, compared what is happening with TerraUSD and Luna to a banking operation. “People don’t trust it anymore, they’re running for the exit,” he said.
Mr. Kwon, the creator of TerraUSD, is also the co-founder of the Luna Foundation Guard, a non-profit that has helped support TerraUSD and maintain its rate.
Earlier this week, the foundation said it lent $750 million bitcoin for trading companies to protect the stablecoin’s peg. The platform’s wallet blockchain records show that it no longer holds bitcoins in that account.
The previous day, the value of TerraUSD rebounded to around 90 cents after falling to 61 cents, while Luna also recovered from the plunge.
Senator Pat Toomey (R., Pa.), the top Republican on the Senate Banking Committee and an ardent crypto advocate in Congress, told reporters during the conference meeting. on Wednesday that the Terra sell-off drew the attention of lawmakers to stablecoins.
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