Why stable crypto wasn’t stable?

The word Crypto has become the cool investing word among youngsters and people started talking about teens and youngsters under 20-25 making big money. But for a lot of us it still remains mystery with no complete understanding of how it works. Playing on investors’ risk appetite, crypto currency is the new kid on the block doing the roller coaster ride. Broadly speaking, the main issue with crypto is that there is nothing backing it and its value can swing either ways in no time. We have seen way too much volatility in crypto currencies. Then there emerged the concept of “Stable crypto”. What is stable crypto? Is it really stable? The subject is quite complex, but if we simplify it at the cost of over simplifying it for a lay man to understand, we can say that stable crypto currency is a crypto currency which is backed by real money. For instance, one unit of stable crypto currency is backed by one dollar. The idea is to maintain the value of stable crypto currency stable at one dollar per unit and use stable crypto currency to transact in crypto currencies. Since it is backed by dollars, you can just take back your dollars  anytime. It sounds really stable, right?  But then why did $200 billion get wiped out of crypto market within 24 hours? The crash of Terra’s LUNA token led to the collapse of the entire crypto market. What caused the fall of LUNA? The cascading effect is rather scary and giving tremors to the central bankers considering the impact it could possible have on real currency. It’s not about LUNA but the stable coin Terra (UST) which was pegged to the dollar. Terra USD (UST) is a slightly different version of a stable coin where the coin is not directly backed by dollars but is an algorithmic stable coin where it is backed by LUNA (another crypto currency) but with a promise that value of UST will be maintained at one unit equals one dollar by the company issuing these currencies. Therefore, while it gives the perception of stability considering that it is dollar backed, the dollar reserves held by the company are questionable and unaudited, leaving matters to trust. Thus, in May 2022 when tokens worth $18 billion were in circulation, the expected reserves to be held by the company to hold the coin stable was $18 billion but that wasn’t the case leading to loss of trust which led to collapse of the so called “stable coin”. The faith is lost in the underlying currency LUNA which tanked 99.9% and the spiral effect was seen on all other crypto currencies taking the market to new lows.

Sujana Hari