2022 has already been a challenging year for crypto. Many hoped the easing of pandemic-related restrictions would help revive the market. Unfortunately, this has not really been the case yet. But few might have imagined the latest crypto crash would involve stablecoins, which play a vital role (especially within the DeFi sector). Stablecoins have long been heralded for their stability by traditional and crypto investors due to their peg with a tangible asset.
In mid-May 2022, the TerraUSD (UST) stablecoin lost its $1 peg to the dollar and went into free fall. Once ranked among the top ten most valuable cryptocurrencies, the coin was trading at a fraction of a cent on Mar 14th. Likewise, the sister Terra (Luna) coin, which traded at nearly $120 in April, also plunged to a fraction of a penny by May 14th.
The collapse of TerraUSD led many on the Internet to post stories of vanished fortunes. One Reddit user said they’d “lost over $450,000.” Another investor soberly described how they would “lose my home soon.”
Terraform Labs CEO Do Kwon pitched a recovery plan that includes a restart of the Terra blockchain to create 1 billion tokens for distribution among UST and LUNA holders.
“While UST has been the central narrative of Terra’s growth story over the last year, the Terra ecosystem and its community is what is worth preserving,” Kwon noted.
The news surrounding TerraUSD and Luna has understandably led some unfamiliar with cryptocurrency to read up on stablecoins out of curiosity about how the unique digital asset actually works. Let’s run through an overview of the stablecoin market and how they are being used today.
What Are Some Other Stablecoins Besides TerraUSD?
The stablecoin market has actually kept growing even as many other cryptocurrencies have slid down in price. In early April 2022, the stablecoin market was valued at about $190.1 billion. The market capitalization rested at just about $38 billion in late February 2021.
The largest stablecoin by a large margin is Tether (USDT). It had an $82.6 billion market valuation in April 2022. Other leading stablecoins include USD Coin (USDC), the Gemini Dollar (GUSD), and MakerDao’s DAI. Many stablecoins are pegged 1:1 to a fiat currency, while some are backed by a basket of other digital currencies as collateral.
Others rely on algorithms to automatically increase and decrease supply to keep the price steady. Still, some stablecoins are collateralized with physical assets like gold or silver.
What Makes Stablecoins So Useful?
Stablecoins have gained prominence because they can theoretically be trusted more than other coins. In addition, they are governed by a central authority who, again, theoretically, has enough assets in reserve to peg the coin.
This does require a degree of trust by coin holders that sometimes is not followed through by the issuer.
For example, Tether had to pay a $41 million fine in 2021 after the US Commodity Futures Trading Commission ruled the stablecoin’s makers had misrepresented that they had “sufficient US dollar reserves” to back every Tether token between June 2016 and February 2019.”
A growing number of businesses have been accepting stablecoins. Doing so can eliminate paying processing fees to traditional payment solution providers. In addition, individuals sending money via remittance to family or friends in other countries have also turned to stablecoins to avoid paying often-expensive cross-border banking fees.
Stablecoin lending can also be very high-yielding, which is especially beneficial for millions across the world without a traditional bank account.
How Can I Buy Stablecoins?
Many stablecoins can be purchased on Bitcoin ATMs or from an online cryptocurrency exchange. Crypto users will need to have a wallet to store coins like if they bought any other type of digital currency. It’s also crucial for any stablecoin buyer to be sure the wallet they rely on will support the coin they’re looking to buy. We recommend ByteWallet for simple, safe, and secure cryptocurrency wallets and better banking services
