One of the largest stablecoins by market capitalization, TerraUSD, plummeted more than 60% in the last 24 hours, sending investors into a frenzy. The algorithmic stablecoin has lost over $11 billion since Monday, reaching a low of $0.2998 this week, stunning investors who have seen the experimental stablecoin lose its $1 value.
Terra launched their coin on Bittrex Global's exchange in September 2020. In April, Terra was the third-largest stablecoin by market cap, but it has seen a dramatic dip in recent weeks.
Traditionally, stablecoins are pegged to stable assets like the U.S. dollar or gold, but Terra recently lost the 1-to-1 peg. Instead of relying on fiat currency or other stable assets like gold, Terra is an algorithmic coin supported by a sister token known as LUNA. The algorithm lets the stablecoin be supplanted with LUNA when Terra plunges below $1 to ensure "stability."
However, this model appears to be broken. With over half of Bitcoin investors in the red, markets have remained volatile. During the recent crypto chaos, Terra and LUNA both took a heavy beating, with neither staying above $1 or capable of being a stable peg for the other, and investors pursuing a massive selling spree of both of the sister tokens. This prompted Terra to sell Bitcoin — its reserve currency — to recoup losses, but that did not lead to the recovery they had hoped.
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The controversial stablecoin departed from the norm by employing a mint-and-burn practice alongside its native token LUNA, which saw prices down by 94% this past week.
The dramatic price dips in the stablecoin market prompted U.S Treasury Secretary Janet Yellen to comment this week that stablecoins remained inherently risky to the financial system: “I think [the volatility with TerraUSD] simply illustrates that this is a rapidly growing product and that there are risks to financial stability and we need a framework that’s appropriate."