Terra crash: Are stable coins really stable? Experts react

How stable are stable coins in crypto world? In the cryptoverse, stable coin prices are supposed to be stable as they are pegged against some other assets.

are stable coins really stable
Representative image

In the cryptoverse, stable coin prices are supposed to be stable as they are pegged against some other assets. However, crypto users were in for a rude shock recently as the price of TerraUSD (UST), one of the top ranking crypto stable coins till then, was reduced to a few cents. At the time of writing, UST was trading at just $0.08719.

While a lot of analysis has been done about what went wrong with TerraUSD and the overall Terra ecosystem, one big question that has emerged from the rubbles of terra crash is – Are stable coins really stable?

Experts say that TerraUSD was inherently flawed as it was algorithmically pegged against other crypto assets and not some real world assets like the US dollar. So when UST lost its peg due to reasons yet clearly unknown, it landed itself in a free fall.

In contrast to UST, some other top ranking stable coins like USD Coin (USDC) and Tether (USDT) are backed by real assets. Experts say that stable coins backed by real world assets are relatively stable.

“Collateralized stablecoins such as USDC and Tether are backed by assets and relatively stable compared to non-collateralised algorithmic stablecoins such as TerraUST. Algorithmic stablecoins do not have any asset backing and are completely decentralised. An algorithm controls the price and supply mechanism,” says Sharat Chandra, VP, Research and Strategy at blockchain-based identity management platform EarthID.

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“Many algorithmic stablecoins have failed in maintaining the peg against the dollar. Basis Cash and Iron are two prominent algorithmic stablecoins that have failed recently,” he adds.

terra price movement
TerraUSD price movement in last 30 days. Source: CoinMarketCap

Om Malviya, President of Tezos India, says the UST stablecoin, which was majorly responsible for the fall, had a fundamental flaw in its mechanism design. “It (the flaw) was known to the big players yet the irresponsible behaviour towards fixing it led to the crash.”

Malviya, however, thinks that one can always trust stablecoins. “As there are several stablecoins which are superbly designed like DAI from MakerDao, which has been stable during crashes and works perfectly. It works on something called collateralised debt positions, which is a good model to build stablecoin on.”

What after TerraUSD crash?

While Terra debacle is alarming, experts thinks it is good in the long run for crypto markets, paving way for stricter regulation of stable coins.

“Terra’s debacle is alarming and raised many questions in the industry. It has also paved a path for authentic, high-level regulations for stable coins. UST is based on algorithms, whereas tangible assets back a few stable coins like Paxos, USDC and others. Stable coins are stable if supported by tangible assets like real estate, gold, metals, or fiat currency like USD or INR,” says Dileep Seinberg, founder and CEO of MuffinPay, a crypto and fintech company.

“Failure of non-collateralized stablecoins would attract stricter regulation for all stablecoins and crypto-assets,” adds Chandra.

(Cryptos and other virtual digital assets are unregulated in India. They are considered extremely risky for investment. Please consult your financial advisor before making any investment decision)

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First published on: 24-05-2022 at 15:55 IST