On Wednesday, the cryptocurrency community saw TerraUSD (CRYPTO: UST) the native algorithmic stablecoin of the Terra (CRYPTO: LUNA) protocol lose its peg while bringing LUNA down with it.
Many are now wondering if something similar could happen with traditional stablecoins such as USD Coin (CRYPTO: USDC), but the same scenario cannot occur with such systems. Here’s why.
What Happened: On Wednesday, TerraUSD saw its price fall away from its peg to a low of under 30 cents per token while Terra lost well over 97% of its value when falling from $33.20 down to a low of $0.8755. Still, the same mechanism that hurt both Terra and TerraUSD cannot hurt traditional stablecoins such as USD Coin.
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TerraUSD is an algorithmic stablecoin not backed by U.S. dollars but highly volatile Terra tokens, while attempting to maintain the token’s value stable at $1 (or “pegged”) thanks to crypto incentives.
Whenever UST trades under $1, it creates an incentive to buy as much UST as possible to then destroy it and mint $1 worth of Terra per each token instead, which can be then sold at a profit.
When UST trades over $1, it creates an incentive to buy Terra and mint as much UST as possible to sell it at a profit since …
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