The Terra blockchain was launched in April 2019 by two Korean entrepreneurs, Do Kwon and Daniel Shin. Terra offered several stablecoins, including TerraUSD, as part of a global payment platform. Terra's native cryptographic token, LUNA, was used for several purposes, including stakeout, governance, and as part of the supply control mechanism that kept algorithmic stablecoins anchored to their fiat equivalents.
The idea was to employ a complex arbitrage mechanism that supported the peg to the dollar so that collateralisation was no longer necessary. Unfortunately for owners of terraUSD and LUNA, the mechanism was not bombproof. In early May 2022, apparently harmful market activity occurred. A group of large investors suddenly sold huge volumes of UST across multiple platforms, and also sold LUNA. In the ensuing downward spiral in UST and LUNA prices, demand for both tokens evaporated.
The original Earth network is now known as Luna Classic (quotation LUNA) and is almost inactive. The new Terra network - produced as a hard fork of the code - no longer offers algorithmic stablecoins. Terra was the second largest cryptocurrency network after Ethereum. The unexpected collapse of Terra has led many observers to question the reliability of the value of market capitalization as a sufficient indicator of the legitimacy and health of the crypto network.
In addition, as a marketing strategy, the Terra Network introduced the “Anchor Protocol”, which created demand by promising consumers a guaranteed 20% Annual Percentage Yield (APY). In March 2022, Mr. Kwon announced that he was lowering rates of return to become more sustainable over time, acknowledging that the initial 20% return was unrealistic.
How stable are stablecoins?
If you trade with fiat-backed stablecoins, the value of the reserve currency will have an impact on the value of the stablecoin. As the US battles rising inflation rates (9,1% yoy as of June 2022), the value of fiat-backed stablecoins such as Tether or USD coin also inflate. The change in the underlying asset due to inflation will reduce the stability of the cryptocurrency. In reality, stablecoins may not be as stable as they seem.
So, is it worth buying stablecoins?
Stable coins provide an interesting proof of concept as to how our economy could move towards a cashless future, but they offer no noteworthy advantage at this time. With interest rates on the rise, there is no reason to use stablecoins instead of the cash equivalent products offered by certified financial institutions. If you need to hold digital currencies, make sure the stablecoins in your possession are adequately secured.