In the world of cryptocurrencies, one of the most key and sensitive elements are stablecoin – digital assets designed to maintain constant value relative to specific base assets. From time to time there is a situation in which Stablecoin loses his “Peg”, i.e. he ceases to be worth as much as it should. This phenomenon is called Development, and its effects can be catastrophic for whole financial ecosystems based on blockchain.
What are stablecoin?
Stablecoin is cryptocurrencies designed to maintain stable value. Most often they are associated 1: 1 to FIAT currencies, such as dollar (USD), euro (EUR) or Jen (JPY). Thanks to this, they can be used as a means of exchange, storage of values and as security in decentralized finance systems (DEFI).
Stablecouins secured by FIAT currencies are, as the name suggests, supported by physical reserves stored in banks or financial institutions. Examples are USDT or USDC. The market is complemented by stablecoin protected with cryptocurrencies – their value is secured with other cryptocurrencies. The most interesting solution in terms of technology and economics are stablelein algorithmic. They do not have physical reserves, and their value is maintained by algorithms that regulate supply and demand. The infamous example is the mouth (Terrausd), which we will mention.
What is Depet?
Since you know what Stablecoin is, it is worth explaining what the deposit is. This phenomenon in which the price of Stablecoin significantly differs from the reference value (e.g. USD 1). It can be a short -term disturbance or long -term loss of market trust. For example, if Stablecoin is to be worth $ 1, and its price on stock exchanges drops to 0.85 USD, we are talking about a message.
Why is deposit dangerous? First of all, for the fact that it can panic investors. People will start selling Stablecoin for fear of further decrease in their value. The situation may simply get out of control.
In addition, the department can shake the DEFI market. This is due to the fact that stablecoin is widely used as loan collateral, liquidity pools and intelligent contracts.
Gracy Chen, CEO of Bitget, told me more about the threat:
Stablecoin dealein is a greater risk for the cryptocurrency ecosystem than Bitcoin’s crash, because Stablecoin is an integral part of fluidity, DEFs and user trust. Department may potentially cause cascading breakdowns, such as the fall of Terrausd in 2022.
The current transparency, quality of security and responsibility among the leading Stablecoin Issuers are insufficient – the lack of full Tether audits, USDC exposure to banking risk and the fragility of algorithmic Stablecoin stablecoin emphasize the market susceptibility to subsequent deposits.
To reduce the risk, the market should enforce real -time audits, prioritize high -quality security, such as American tax bonds, strengthen regulatory supervision and diversify the use of Stablecoin to reduce dependence on several dominant players. Extreme conditions and risk tests in the field of risk are also critical steps. Bitget actively supports these efforts, in favor of more stringent standards, examining verification in the chain and educating users to ensure the resistance of the ecosystem.
The loudest cases of deposits
Terra
The most famous and dramatic case of a message was the fall of the mouth, algorithmic Stablecoin, which was associated with the Luna token. In the spring of 2022 he lost his Peg to the American dollar and for a few days his course fell to almost zero. As a result, over USD 40 billion evaporated from the market, the entire Terra ecosystem broke down and eventually buried the ideas of algorithmic Stablecoin.
In this example, I will stop for a moment to explain how the depega happened. The mechanism of USDT’s operation was working like this:
- If the mouth rate was higher than USD 1, users could burn Luna tokens to create their mouths and sell them at a profit,
- If the price dropped below USD 1, users could burn their lips to get the equivalent of Luna – which was supposed to reduce the supply of lips and restore its value.
So how did the project fall. I will describe it for you in points.
- It all began in the Anchor protocol, which offered up to 20% of the annual profit from deposits in Ust. This artificially fueled the demand for lips – people bought Stablecoin to earn passively.
- At some point, investors, however, began to draw their funds from Anchor massively. In a few days billions of USD were withdrawn, so sales pressure increased – Stablecoin began to lose value.
- The Luna Foundation began to sell Bitcoins worth billions of USD to buy lips and restore PEG. Problem? This also reduced the price of Bitcoin, which intensified declines throughout the market.
- The so -called death spiral. When his mouth fell, more and more people exchanged him with Luna. The system “printed” Luna to buy back his mouth – which caused Luna hyperinflation. The price of Luna dropped to … a fraction of the cent. And it was the end of the project.
Why did the system disappoint? The problem was the lack of real protection – there was only an algorithm and trust. This was applied to too much dependence on Anchor Protocol and artificially inflated demand. The project lacked a flexible stabilization mechanism in crisis conditions. The icing on the cake was a psychological effect – market panic.
USDC
Stablecoin Circle, USDC, also included his department.
USDT
Tether also recorded short and small markers in the past, e.g. a decrease to 0.94 USD in 2018. However, the issuer has always managed to raise the course to 1 USD.
Summary
Stablecoin is a pillar of a modern cryptocurrency market. However, when they lose their stability, this can lead to an avalanche of problems – both financial and image. The phenomenon of a message is a warning that no system is perfect and trust is a key resource in the world of decentralized finances.
A particularly important lesson on the market is the fall of Terry, which really destroyed the very interesting ideas of Stablecoin based only on algorithms. As a result, stablecoin is based mainly on FIAT currencies, which is also quite … strange. After all, the cryptocurrency market was supposed to be something more – the value of digital assets should flow out not from the very faith in value, but from the actual value, flowing out of the emission method (Bitcoin) or being the center of the Defi market (Ethereum).
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