The prices of popular cryptocurrencies like Bitcoin, Ethereum and the wider crypto market plunged last week, triggered by the crash of so-called stablecoins, a type of cryptocurrency that is supposed to protect buyers from the volatility of digital currencies.
The downfall of the Terra token economy, widely viewed as one of the biggest experiments in decentralized finance to date, saw investors cut their losses and move their money to less volatile assets. Lastly you have algorithmic stablecoins like UST, which are under collateralised, most of which are based on arbitrage opportunities when the coin is “off” the $1 peg.
There are roughly 200 varieties of stablecoins on the market, with the three largest by market value being Tether , USDC and Binance USD .What caused the collapse? Like Bitcoin or Ethereum, Terra has its own blockchain. Its primary product is the UST, an algorithmic stablecoin pegged to the dollar which relies upon code, constant market activity and belief to maintain its peg.The way algorithmic stablecoins work is through a mechanism that encourages arbitrage. Essentially, it is game theory.
This caused UST to de-peg from the dollar, and a bank run ensued as investors who had earned interest via Anchor scrambled to get out before the linked token Luna also crashed.
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