TerraUSD (UST) to sell BinanceUSD (BUSD) in third place on the market value list did not last long. The once mighty stablecoin that powers the entire Terra ecosystem finds itself reduced to a “Terra is more than ICT” tweet. While no one knows for sure if LUNA can stage a comeback, UST will definitely go down as one of the algorithmic stack coins that went the same way as Basis Cash – of which Terra creator Do Kwon was reportedly a part – and Mark Cuban- supported Iron Finance.
The failure of ICT raises the question of whether algorithmic stablecoins are really just doomed to fail? And is fiat-backed or cryptocurrency-backed stablecoin the only way investors can find the “most stable” way to hedge against market volatility?
Pros and cons of different stablecoins
Nowadays, most people are aware of types of stablecoins such as fiat-backed stablecoins, cryptographic stablecoins and algorithmic stablecoins. There are also other types of stablecoins such as product insurance and seigniorage, but the three mentioned above are the most popular.
Users have their reasons for choosing one type of stablecoin over another. For example, some people prefer to use algo stablecoins because of the scattered story. Others would go for fiat-backed cryptocurrencies such as Tether (USDT) and USD Coin (USDC), even if they are centralized by private companies holding the corresponding fiat reserves of each issued token. However, the advantage of fiat-backed currency is that it is a real asset that supports the currency.
The stability of its connection will remain as long as verifiable assets exist in such foreign exchange reserves. However, the most obvious risk here is banking, which for Tether could be difficult given how it is largely exposed to commercial paper. Commercial bonds are issued by large companies and are a type of unsecured debt that can have maturities longer than 270 days. A large number of redemptions can make Tether bankrupt and as a result it has reduced its commercial paper holdings in the last six months.
Stablecoins with cryptocurrency such as Dai (DAI), on the other hand, are backed by an oversupply of other cryptocurrencies, in this case Ether (ETH). DAI requires a minimum of 150% collateral, which means that the dollar value of ETH deposited in a smart contract must be at least 1.5 times more valuable than DAI on loan. For example, in order for a user to be able to borrow $ 1,000 worth of DAI, he must lock $ 1,500 in Ether. If the market price of Ether falls to such an extent that the minimum insurance ratio is no longer met, the insurance is automatically paid back into the smart contract to resolve the situation.
Stablecoins are of course meant to keep their value when connected. What happened to ICT, however, was incredibly unprecedented and even threatened the collapse of the entire market. ICT is a hybrid between algo stablecoin and stablecoin with cryptocurrency. When the price of ICT exceeds the dollar link, users are encouraged to burn $ 1 worth of LUNA for ICT to sell at a profit. When UST drops for plugs, users can burn UST in exchange for a discount on LUNA. It became encrypted as the Luna Foundation Guard acquired a large amount of Bitcoin (BTC) collateral as a response plan. This, as it turned out, was unsuccessful, and so were BTC’s last assets and other assets assigned to small farmers in compensation.
Terra’s collapse began with a major withdrawal of the Anchor Protocol on May 8. Millions of ICTs were withdrawn from the protocol and sold quickly, causing a downturn. What followed was more panic. Finally, the algorithm could not respond quickly enough – by burning LUNA – to a rapid decline in the value of ICT.
In retrospect, the evidence was obvious as the main demand for ICT was only obtained from the demand in Terra’s Anchor Protocol. The low volume of business ICT indicates that users are more interested in keeping it in the protocol than actually using it for business.
DAI remains stable
Amid the panic, with Tether losing even for a short time against the US dollar, DAI had in fact remained relatively stable. At one point, the USDT fell to about $ 0.994 on May 9, while the DAI rose to $ 1,001. DAI has even recently been hailed as the “true” distributed stablecoin.
Having been around since 2017, DAI has survived many difficult market conditions that no algo stablecoin has ever been able to do. Yet there can never be a lack of risk, especially in the cryptocurrency market.
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