The cryptocurrency market has crashed this week, with Bitcoin hovering between US$28,000 and US$30,000 over the past two days – less than half the value of the all-time high it reached in November – and Ethereum just over US$2,000, which is also less than half the value of its November peak. A significant portion of the blame goes to a cryptocurrency called TerraUSD.
TerraUSD is one of the largest of so-called “stablecoins”, which means it is supposed to hold a value close to that of a fiat currency – in this case, the US dollar. Cryptocurrency investors see stablecoins as something of a checkpoint in the crypto game, “safe” places to store their investments when not buying into more volatile currencies. And yet, this week, the value of TerraUSD fell to 30 cents at its lowest, and right now it is still just above 80 cents. As FastCompany pointed out, TerraUSD “typically fluctuates by a few thousandths of a percent.”
Unlike other stablecoins, TerraUSD is pegged to a cryptocurrency rather than directly to the fiat currency it is supposed to maintain parity with. In the case of TerraUSD, it is tied to Luna, which is built on the same blockchain. TerraUSD and Luna reserves are created and destroyed algorithmically to maintain their relative value, bouncing less than a cent back and forth to make them worth buying and selling, with transactions between them helping also to stabilize their value.
Until this week, when the value of Luna plummeted over 75%, dragging the value of TerraUSD down with it. At that time, TerraUSD creator Do Kwon opened up his reserves, $3.5 billion worth of Bitcoin he had purchased to back TerraUSD, and sent shockwaves through the already volatile Bitcoin market. cryptocurrency. As Reuters reported, crypto assets lost $800 billion in market value in a month, and the Wall Street Journal pointed out that NFT sales are also plateauing.
As to why Luna’s value dropped, that’s unclear. CoinDesk traces it back to “a series of major peg protocol pullbacks,” a market for stablecoin trading, as well as major TerraUSD pullbacks from the Curve stablecoin market. conspiracy theories about a “deliberate and coordinated” “attack” that spread throughout the crypto community.
Meanwhile, it was revealed that prior to creating TerraUSD, Do Kwon was a co-founder of a failed stablecoin called Basis Cash, going by the alias “Rick Sanchez”, after the Rick & Morty character. Which is honestly a perfect cap to put all the baffling on.