Risk analysis of stable coins: after the collapse of Terra: can other stable coins such as Tether, DAI & Co also break? | knowledge


• The TerraUSD crash shook the cryptocurrency markets
• Stable coins differ in their collateral
• Stable coins with collateral are also not risky

The cryptocurrency market, which has already been hit hard this year, had to deal with a huge blow last week: TerraUSD (UST) shocked the digital currency market when it fell into the flow of the associated cryptocurrency LUNA within days and had to abandon its peg to the US dollar. The developers of TerraUSD have promised to create a stable coin. However, the decentralized stable coin is linked to LUNA tokens – and collapsed.

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The specific plan of the developers was to create an algorithmically stable coin with the UST. The UST should be binding US dollarsFor it to remain stable against the green tip, LUNA coins must be destroyed to the extent created by the UST. However, the huge sell-off shook the balance and led the system to an absurdity: massive LUNA coins had to be created to stabilize a stable coin, resulting in hyperinflation. Investors reacted panicked and increased downward pressure, while the sale of borrowed securities allegedly worsened the situation. Although the Luna Foundation tried to liquidate Bitcoin– Stocks trying to rescue, but damage was done.

The collapse caused shock waves throughout the cryptocurrency market, as well as bringing veterans such as Bitcoin and Ethereum huge pressure. It is also usually a stable stable coin Tether sometimes dropped below $ 0.95 as investors panicked and threw away what looked like a cryptocurrency.

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But what is the real danger of stable coins? After all, before the disaster, the UST of Terra stablecoin was estimated at about $ 20 billion, along with Tether and USD cointhe third largest stable coin in the cryptocurrency market.

Stablecoin is not just a stable coin

In order to assess whether there is a risk of recurrence of events related to Terra UST for other stable coins, a closer look at the stablecoin design is required. There are basically three different possible variants of stable coins: stable coins with fiat collateral, cryptocurrency stable coins, and algorithmic stable coins.

Stable coins with Fiat base

Tether is the most striking example of stable coins protected by fiat, ie coins denominated in fiat currencies. The coin is physically covered in US dollars, with each individual bar being covered in US dollars equivalent. So Tether owns the assets and issues digital tokens and promises: “Every Tether is based on real fiat money. A stable coin can act as a link between real money and online currencies. Tether is not a classic online currency, but allows investors to temporarily leave their dollars in order to continue operating in the cryptocurrency market.

As a result, fiat-based stable coins have historically been considered a relatively safe alternative to cryptocurrencies, providing stability in an otherwise highly volatile market.

However, the system is not without risk. In the past, Tether has often been criticized for its centralized approach, and investors must trust the company that supports Tether and its promises to have enough assets to secure the coins. In fact, the developers of Tether already had to answer in court for false allegations and were fined millions: because Tether is not covered by their own cash, as reported. Since then, coin security has been reported much more transparently as part of regular transparency reports. They show that 83.74 percent. reserves consist of cash, cash equivalents, short-term deposits and short-term unsecured debt, while the remainder consists of corporate bonds, funds and precious metals, secured loans and ‘other investment (including cryptocurrencies)’. . It is interesting to look at the composition of cash reserves: the share of cash is only about 6.3 percent, treasury bills account for the largest share of cash reserves – 52.41 percent, 36.7 percent. derived from money market paper and …

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