The recent collapse of one of the third largest stablecoins, TerraUSD (UST), has raised questions about other fiat-related tokens and their ability to maintain their holdings.
Stability of Stablecoins in question
Stablecoin companies claim that each of their issued tokens is backed by real and / or cryptocurrency assets, so they behave as an important component of the cryptocurrency market, giving traders a choice to deposit their cash between betting on volatile currencies.
They include stablecoins that are reportedly 100% backed by cash or cash equivalents (bank deposits, treasury bills, commercial paper, etc.), such as Tether (USDT) and Circle USD (USDC).
At the other end of the spectrum are the stablecoins algorithms. They are not necessarily backed by real assets but are dependent on financial engineering to maintain their connection with fiat money, usually dollars.
However, following the collapse of the UST — algorithmic stablecoin, this stability is now in doubt.
Distrust has led to a huge outflow of both asset-backed and algorithmic stablecoin projects. For example, USDT’s market capitalization fell from $ 83.22 billion on May 9 – the day UST began to lose its US dollar connection – to $ 72.49 billion on June 2.
The USDT plummeted from a 1-on-one dollar balance while exiting, albeit briefly. Unfortunately, this is not the case with algorithmic stablecoins; some are still shopping below the proposed fiat pegs, as discussed below.
USDX, the native “decentralized” stablecoin Kava Network, was notorious for trading mostly 2-4 cents below the dollar. But it moved further away from its almost perfect connection to the green back amidst the TerraUSD problem.
In detail, the USDX fell to its lowest level recorded – $ 0.66 – on 12 May. The USDX / USD pair has been trying to restore their dollar connection ever since and was swapping hands for about $ 0.89 on June 2, as shown below.
Meanwhile, USDX has witnessed a $ 60 million outflow since May 9, showing traders redeeming their tokens.
Kava Labs, the development team behind Kava Network, pointed out that USDX lost its dollar connection due to exposure to ICT as one of its guarantees. At the same time, the decline in other USDX reserve assets, including KAVA, Cosmos (ATOM) and Wrapped Bitcoin (WBTC), also shook its stability.
1 / $ UST has (obviously) been significantly disconnected and has announced some risks for protocols that use it. The ICT risk in Kava is isolated and can be tolerated with current system variables.
– Scott Stuart (@Scott_Stuart_) May 11, 2022
In May, Scott Stuart, co-founder and CEO of Kava Labs, asserted that USDX would maintain its dollar peg after rinsing ICT out of its ecosystem.
VAI is another victim of the ongoing stablecoin market.
The algorithmic stablecoin, based on the Binance Smart Chain-based Venus Protocol – lending platform, traded for $ 0.95 this June 2nd. However, like USDX, the symbol is notorious for trading under the planned dollar peg from the beginning.
Related: DeFi protocols launch stablecoins to attract new users and liquidity, but does it work?
For example, in September 2021 – long before TerraUSD collapsed, VAI had dropped to $ 0.74. In addition, a decoupling scenario took place after the Venus Protocol suffered a $ 77 million bad debt loss in May 2021 due to a major breakdown in its lending platform.
The market value of VAI was 272.84 million dollars in May 2021. But after the debt bondage of Venus, along with the collapse of TerraUSD, VAI’s net worth fell to almost 85 million dollars, indicating a significant depth in its demand.
A few constant exceptions
DAI, Stablecoin’s native algorithm for Maker – peer-to-peer lending platform, did extremely well against its rivals, never swinging too far from its promised dollar peg, even after witnessing a 20% drop in market value since May 9th.
FRAX and MAI, other stablecoin algorithms, also maintained their dollar link while TerraUSD collapsed.
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