Stablecoin Update – Teetering on the Brink of Freefall

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The situation surrounding LUNA and the Terra network has worsened overnight, and the entire

$30 billion Terra ecosystem is on the brink of collapse. It appears that a death spiral that many analysts have feared is becoming a reality. UST’s price has recovered slightly and is now at 55c, but this has come at a massive cost. Over 1 billion LUNA tokens have been minted over the past 24h to regain UST’s peg resulting in the collapse of LUNA’s price to 5c.

The impact of the destruction of a top 5 crypto asset in a matter of days has been disastrous for crypto markets. The panic has been further compounded by US inflation numbers coming in higher than expected yesterday and Coinbase’s revenue dropping by 27%. The chaos has brought renewed speculation surrounding Coinbase’s solvency, and all stablecoins and their backing.

USDC and BUSD are currently trading at a slight premium as traders scramble to find protection from the harsh market selloff. Fiat-backed USDT appears to be the worst hit of the stablecoins having traded down to 0.95 during the course of the morning. It sits currently at an untenable

0.98 and many liquidity providers have ceased making a market in USDT. The CTO of Tether, the company responsible for maintaining USDT’s reserve, has reassured investors by saying in a tweet that Tether is still processing redemptions as usual but for us, with this poor level of communication to the market, we fear they brought a knife to a gun fight.

The credibility of the Defi space is being called into question like never before yet we hear nothing from the CEO of Tether nor any of the senior figures of the Terra network. No rescue plans, no orderly restructurings, no clear market guidance. Just an abdication of their duties while the stablecoins that are meant to serve as the financial backbone and link to the fiat system are drifting off peg. Note in contrast the efforts of the Hong Kong government in recent days to calm market nerves of their currency devaluing. Regulation and the heavy hand of the law can not come fast enough to our industry where it seems that the minute market conditions turn, the Billions of fiat spent on sponsoring F1 cars cannot translate itself into an effective communication strategy to soothe market nerves. The market has now lost all faith in the algorithmic stablecoin model following the depegging of UST. The second-largest algorithmic stablecoin, USDN has also lost its peg and is now at 76c.

Not all stablecoins are created equal, and fully fiat-backed stablecoins (USDT, USDC, BUSD) are significantly safer than algorithmic or partially backed stablecoins. So far today USDC appears the standout leader.