Here’s why stablecoins cannot really stay stable

This has been one of the most difficult years for the bitcoin sector. The bears managed to attack even the stablecoins that could not retain their peg with the U.S. dollar. USTC, formerly Terraform Labs’ stablecoin, lost its peg to the US dollar in May, exerting significant downward pressure on other blockchain assets.

Reasons Behind Stablecoins Losing Their Peg

USDD, Tron’s stablecoin, is another algorithmic stablecoin that has struggled to remain coupled with the dollar. On June 19, 2022, the altcoin sank to $0.93 and has not traded at $1 since November 27. Furthermore, it is not just algorithmic stablecoins that are suffering this year.

In a comparable situation, USDT, the major stablecoin asset on the crypto market, has also experienced low days in 2022, drifting away from the $1 threshold at times. The giants USDC and BUSD have followed a similar path. Circle’s stablecoin is currently trading at $0.99 at the time of writing. What causes this to happen? First, the decline of algorithmic stablecoins must be examined. They are the most disruptive players in the cryptocurrency sector.

These stablecoins do not utilize an asset as security to preserve their parity with the dollar. In this sense, algorithms are in charge. They are designed to increase or decrease their total circulating supply while maintaining stability in response to market conditions.

The main issue is that the algorithm is occasionally erroneous or incorrectly designed. This results in situations different than what was intended to remove a stablecoin’s parity with the dollar. For example, in the instance of USTC, the Terraform Labs ecosystem had weaknesses that allowed arbitrage possibilities to be exploited because of the limited liquidity of Curve (CRV), which supported the stablecoin’s parity.

In addition, the Defi Anchor project, which allowed users to deposit USTC to earn rewards, lowered its yield from 20% to 4% in May. Many investors were taken aback by this, and many opted to withdraw UST from Anchor and sell it on the open market.

As a result, in a short period, USTC lost its peg, plummeted to pennies on the dollar, and wiped out the economies of many people who trust stablecoins. Stablecoins like Dai, USDT, USDC and BUSD need to be professionally managed not to lose their peg with the dollar.

For example, Dai, MakerDAO’s stablecoin, offers a particularly appealing pitch because it is decentralized and has guaranteed parity with cryptocurrencies. However, if Dai does not have a good reserve, it may lose its peg to the dollar during a market crisis when the price of cryptos falls.

In actuality, however, everything is very different, and stable assets are only slightly less volatile than Bitcoin (BTC) and do not meet their value offer.

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