The recent collapse of TeraUSD (UST), once the third-largest stablecoin, has raised questions about other fiat-pegged tokens and their ability to maintain their pegs.
The stability of the stable coins in question
Stablecoin firms claim that each of their issued tokens are backed by real-world and/or crypto assets, so they behave as an important component in the crypto market, allowing traders to trade their money between betting on volatile coins. There is an option to park cash.
They include stablecoins that are believed to be 100% backed by cash or cash equivalents (bank deposits, treasury bills, commercial paper, etc.), such as Tether (USDT) and Circle USD (USDC).
At the other end of the spectrum are algorithmic stablecoins. They are not necessarily backed by real assets, but they rely on financial engineering to maintain their peg with fiat currency, usually the dollar.
However, following the collapse of the UST-an algorithmic stablecoin, stability is now in doubt.
The mistrust has led to massive outflows from both asset-backed and algorithmic stablecoin projects. For example, USDT’s market capitalization has fallen from $83.22 billion on May 9 – the day UST began to lose its US dollar peg – to $72.49 billion on June 2.
Faced with outflows, USDT pulled out of its one-to-dollar parity, albeit briefly. Unfortunately, this is not the case with algorithmic stablecoins; Some are still trading below their intended fiat pegs, as discussed below.
The USDX, the original “decentralized” stablecoin of the Kava network, was notorious for mostly trading 2-4 cents below the dollar. But, it moved further away from its near-perfect peg with the greenback in the midst of a TeraUSD debacle.
In detail, USDX fell to its all-time low of record- $0.66 on May 12th. The USDX/USD pair has since been trying to reclaim its dollar peg and was changing hands on June 2 to around $0.89, as shown below.
Additionally, USDX has seen an outflow of $60 million since May 9, indicating that traders are cashing out their tokens.
Kava Labs, the development team behind the Kava network, noted that USDX lost its dollar peg due to exposure to UST as a collateral for USD. Meanwhile, declines in other USDX reserve assets including Kava, Cosmos (ATOM) and Wrapped Bitcoin (WBTC) also shook its stability.
1/ $UST is (obviously) significantly de-pegged and has promulgated some risk to the downstream protocols that use it. The UST risk in kava is isolated and can be tolerated with existing system parameters.— Scott Stuart (@Scott_Stuart_) 11 May 2022
In May, Scott Stuart, co-founder and CEO of Kava Labs, emphasis on USDX will maintain its dollar peg once UST is taken out of its ecosystem.
VAI is another victim of the ongoing stablecoin market route.
Binance Smart Chain-based algorithmic stablecoins built on the Venus protocol, a lending platform, traded for $0.95 this June 2. However, like USDX, the token is notorious for trading below its intended dollar peg since launch.
Related: DeFi Protocol Launches Stablecoins To Attract New Users And Liquidity, But Does It Work?
For example, in September 2021, long before the collapse of TeraUSD, VAI dropped to as low as $0.74. Furthermore, the D-peg scenario occurred when Venus Protocol lost $77 million on bad loans due to a large liquidation in its lending platform in May 2021.
VAI had a market capitalization of $272.84 million in May 2021. But following the Venus debt crisis, accompanied by the collapse of TeraUSD, VAI’s net valuation fell to around $85 million, indicating a substantial decline in its demand.
some static exceptions
DAI, an algorithmic stablecoin native to Maker, a peer-to-contract lending platform, performed exceptionally well compared to its rivals, despite a 20% drop in its market capitalization since May 9, despite its promise. The dollar peg done didn’t fluctuate much.
FRAX and MAI, other algorithmic stablecoin projects, also maintained their dollar pegs during the TerraUSD crash.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, so you should do your own research when making a decision.