OPINION: The run on terra will test both the stability of that particular stablecoin, and more broadly, whether the entire crypto sector has a future.
Some cryptocurrencies have always been fairly volatile, with values soaring or plunging within a short space of time. So for the more cautious investor, “stablecoins” were considered the sensible place to go. As the name implies, they are designed to be a steadier and safer bet.
For in theory, stablecoins are supposed to offer the transactional benefits of more traditional cryptoassets but with a predictably stable worth. In this case terra is tied to a partner coin called Luna LUNAUSD, -76.09% —and the value of Luna has crashed. Its value is now less than $0.02 having been trading at around $82.00 just seven days earlier. In a climate where the value of terra and Luna are both drastically declining, the algorithm cannot solve the issue of decreasing faith in the paired currencies—and the stabilisation feature simply does not work.
Save the savings All of this undermines the basic premise of these coins—that they will remain stable. Customers choose to buy them to either shield against volatility in traditional crypto markets until they rise again, or to use them as a more traditional account and take advantage of the benefits they offer with regard to speed, cost, and ease of international transactions.
Also read: Cryptocurrency market turbulence is not ‘real threat’ to U.S. financial stability, Yellen says The time for allowing the sector freedom to innovate seems to have passed. Regulation is essential—to offer consumer protection, and ban excessively risky practices—if the potential of stablecoins is to be realised. That potential is something that many feel could revolutionise the global economy, speeding up transactions, reducing costs and increasing transparency.
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