"Stablecoin" Hasn't Killed Crypto, But It Was A Narrow Escape

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Stablecoins are a vital part of crypto.

Speculation that the collapse of one of the biggest experiments in decentralized finance could bring about the death of crypto appears to have been overblown. If Terra's implosion had happened after a few more months of growth, the resultant market impact might have created a DeFi version of 2008 — instead, high-profile algorithmic stablecoins may end up being the main casualty.

In a tumble starting on May 9, Terraform Labs' TerraUSD — a token that primarily uses algorithms, rather than collateral, to adjust its supply and maintain a 1-to-1 peg with the US dollar — and its digital coin counterpart Luna lost almost all their value, while activity on the underlying Terra blockchain was twice suspended. A month after reaching a record of $119, the price of Luna now trades at near zero, while UST is stuck around 20 cents.

The meltdown sparked crypto price declines across the board; they later stabilized and recovered somewhat, but not without knocking some $300 billion or so off of the sector's trillion-dollar total market value. Most significantly, it caused wobbles in even the largest collateralized stablecoins, which back their peg with dollar and dollar-equivalent assets — though they too returned to business as usual by the end of the week.

Stablecoins are a vital part of crypto because they are used by traders as a means of retaining value without leaving the digital asset ecosystem. Investors turn to them as a safe haven during periods of volatility, or even simply as a means of digital payment. Now, questions remain on whether the unique mechanism behind TerraUSD might be entering retirement, at least for use by projects that get too big to fail.

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