Originally published on: June 02, 2022
The recent collapse of TerraUSD (UST), once the third-largest stablecoin, has sparked concerns about the stability of other fiat-pegged tokens in the market.
Stablecoin companies assure traders that their issued tokens are backed by real-world or crypto assets, providing a safe haven for cash in the volatile crypto market. Some stablecoins, like TetherUSDT and Circle USD (USDC), claim to be 100% backed by cash or cash equivalents.
On the other hand, algorithmic stablecoins rely on financial engineering rather than real assets to maintain their peg with fiat currencies. However, following the collapse of UST, doubts about the stability of these tokens have emerged.
The decline in UST’s value has led to significant outflows from both asset-backed and algorithmic stablecoin projects. For example, USDT’s market capitalization dropped from $83.22 billion to $72.49 billion in just a few weeks.
While some stablecoins like USDT experienced brief deviations from their pegs, others like USDX and VAI struggled to maintain their dollar parity. USDX, Kava Network’s stablecoin, dropped to $0.66 in May before attempting to reclaim its peg.
Similarly, VAI, an algorithmic stablecoin on the Venus Protocol, also faced challenges with maintaining its peg due to market dynamics. Despite some stablecoins like DaiDAI, FRAX, and MAI maintaining their pegs during the TerraUSD crisis, the overall stability of the stablecoin market is now in question.
As the market continues to adapt to these changes, investors are advised to conduct thorough research before making any investment decisions. Stay informed with critical insights and market updates by subscribing to the Markets Outlook newsletter today.
