What’s Going On With TerraUSD?
When it comes to digital currencies, stability is key. That’s why so-called “stablecoins” have become popular in recent years. Stablecoins are digital assets that aim to maintain a stable value, usually by being pegged to a major fiat currency like the U.S. dollar.
While being considered a stablecoin, The TerraUSD (UST) does come with some evident risk because of its dependence on complex algorithms to hold its dollar peg.
“It’s all fun and games if you’re a $5 [billion] or $10 billion market cap stablecoin,” Tether Chief Technology Officer Paolo Ardoino said in an interview with CoinDesk at the Paris Blockchain Week Summit. But that can change the bigger that stablecoin’s market cap gets.
“When you get to the size of Tether, which is around $50 billion now, you’re a systemic risk,” Ardoino further said.
TerraUSD is now the third-biggest stable coin on the crypto market. TerraUSD has grown significantly since the beginning of 2021, from a $180 million Market capitalization to over $17 billion as of April 18.
Terraform Labs is the organization behind the UST stablecoin and its LUNA token. The team has partnerships with some of the biggest names in the cryptocurrency industry, including Binance, Huobi, OKEx, and KuCoin.
The explosive growth of TerraUSD is a result of both new investment and appreciation. Much of the recent price action appears to be due to appreciation as investors seek out safe havens during these uncertain times. While some have raised concerns about the potential for manipulation given the coin’s centralized nature, Ardoino said he doesn’t see that as a problem.
“We don’t need to rely on organic growth,” he said. “If we wanted to, we could mint and burn $50 million every day and no one would ever know.”
To maintain its 1 dollar value, UST utilizes smart contract-based algorithms to keep the price of UST permanently anchored to $1 by destroying LUNA tokens to mint UST tokens.
With all the success of UST in the past years comes risks well. Researchers from the University of Calgary expressed their concerns about algorithmic stablecoins in 2021. Extra caution was directed at the LUNA token. According to the researchers, due to the manner in which the Terra ecosystem operates, strong market volatility could pose a major threat to UST’s 1 dollar peg.
Another raised concern was that over 67% of the demand for UST comes from Anchor Protocol. This is a decentralized lending platform that allows users to stake their cryptocurrency and earn interest. Due to the high demand, if something goes wrong with the protocol, it could result in large-scale liquidations that would put immense selling pressure on the market.
Anchor has responded to these concerns by stating that they have multiple safety mechanisms in place to deal with such an issue.
Nonetheless, it is still a valid concern for many investors.
Another thing to consider is that the Terra protocol is still in its early stages. The mainnet only launched in March of this year and there is still a lot of development that needs to be done.