TerraUSD Loses Peg, What Does This Mean?

While some volatile tokens have lost significant amounts of value in recent days, Bitcoin has lost over 23% ($9,000) in the last five days and Ethereum has lost over 20% ($600) at the time of writing, much of the industry is keeping an eye on TerraUSD (UST), a stable coin that varies by just 10%. But why? What makes its fluctuation matter? In this article, Tokenize will help you understand what happened to TerraUSD and its impact on the cryptocurrency market in general. 

>>>Read more: All about TerraUSD

Firstly, we need to understand what ‘peg’ is

A “peg” is a price that is set for the exchange rate between two assets. This is in stark contrast to “floating” currencies, which have no fixed price goal and pursue a more accommodative monetary policy.

A peg in the context of cryptocurrency refers to the price that a token aims to maintain. The most common application of a peg is for stablecoins, which are digital assets that keep their value over time. USDT, UST, and USDC, all of which are tied to $1, are notable instances.

How stablecoin works?

Stablecoin is a type of cryptocurrency created with the aim of minimizing the impact of volatility by pegging to a range of stable assets such as real money (fiat money), commodities (gold, silver), or other cryptocurrencies. 

Stablecoins appeared to solve the biggest problem in the cryptocurrency market right now, which is high volatility. Instead of transferring to Fiat, crypto traders and investors can easily transfer their digital assets into stablecoins to avoid the volatility of cryptocurrencies for their personal use. 

Terra recently overtook Ethereum as the second-largest DeFi protocol, with approximately $18 billion in total value locked, according to data provider DeFi Llama.

As an algorithmic stablecoin of the blockchain network Terra, in order to avoid the effects of cryptocurrency market volatility, Terra maintains the value of UST by ensuring that its supply and demand are always in balance. 

So below is exactly what happened to TerraUSD, the stablecoin of LUNA

The supply of Terra USD (UST) increased dramatically over the weekend, causing the token’s price to plummet to under 0.99 dollar since 8th May. In other words, TerraUSD loses peg. 

It wasn’t the first time UST had decoupled from its dollar peg, but it was the first following a new attempt to shore up its stability by purchasing up to $10 billion in Bitcoin and $200 million in Avalanche tokens to serve as a backup reserve.

However, the major of crypto community believes the event was staged, as hundreds of millions of dollars worth of UST were sold in a matter of seconds, coupled with nearly $2 billion in withdrawals from Anchor Protocol, which acts as a UST bank.

#Ponzi began trending on Twitter, which some now believe was a coordinated UST disinformation campaign. ‘Men will literally attack a stablecoin unsuccessfully instead of going to therapy.’ Do Kwon, the creator of UST developer Terraform Labs, reportedly remarked in a since-deleted tweet.

On Tuesday, the situation became worse when UST price dumped to $0.69, creating a terrible FUD for crypto investors before recovering after a few hours, prompting some to question the principles underpinning algorithmic stablecoins as well as their long-term prospects. At the time of writing, USDTerra price was $0,9, 10% down from the stable price. Stablecoins aren’t supposed to wobble in any way.

>>>Read more: Things To Know Before Buy the Dip

So now we got the answer to the question:Why ‘TerraUSD loses peg’ impacts the crypto market?

The answer is that TerraUSD is a stablecoin, which is a cryptocurrency token whose value is tethered to the value of a more stable asset, such as the US dollar, to mitigate some of the dangers associated with cryptocurrencies.

It retains the benefits of a digital coin—near-instant transactions, the anonymity, and security of a decentralized system—but without the overhanging threat of losing half your net value in minutes at the whims of a market flooded with prospectors.

Bottom line

Though UST price has partly recovered, its problems could have even worse short-term consequences for the rest of the cryptocurrency market, as fears are growing that Terra will sell off its Bitcoin to keep its peg, exacerbating the already dire crypto crash that has seen over $200 billion disappear from top tokens in the last week.