Stablecoin TerraUSD continues downward spiral; Bitcoin gains

TerraUSD fell to 10 cents early Friday, After he refused 82% in the past 24 hours, according to CoinDesk. Its price rose to about 14 cents in the late afternoon. The formerly third largest stablecoin – a type of cryptocurrency known for its stability – has backed away from its dollar peg A sell-off started this weekend. Its decline led to the decline of its sister token, Luna, and weighed on Bitcoin. Luna fell to less than half a cent on Friday, down from more than $60 on Monday.

The blockchain behind TerraUSD and Luna It’s been turned off twice As network auditors seek to validate digital assets. Binance, the largest cryptocurrency exchange by volume, suspended trading From both TerraUSD and Luna late Thursday.

On Friday, the blockchain and Binance both resumed trading on TerraUSD and Luna, according to the two companies.

Stablecoins have grown in popularity in the past couple of years and are now serving as the grease that drives the gears of the cryptocurrency ecosystem. Traders prefer to buy currencies like bitcoin, ether and dogecoin with digital assets pegged to the dollar because when they buy or sell, the price moves only on one side. They also allow for fast trading without settlement times associated with government-issued currencies, which can take days.

While the most popular stablecoins maintain their levels through assets that include dollar-denominated debt and cash, TerraUSD is an algorithmic stablecoin that relies on financial engineering to maintain its peg to the dollar.

In the past, TerraUSD maintained its $1 price tag by relying on traders who acted as its backers. When it drops below the peg, traders burn the stablecoin – and take it out of circulation – by exchanging TerraUSD for $1 of new Luna units. This action reduced the supply of TerraUSD and raised its price.

Conversely, when the value of TerraUSD rises above $1, traders can burn Luna and create a new TerraUSD, thereby increasing the supply of the stablecoin and lowering its price back towards $1.

That financial engineering to maintain its peg began to falter over the weekend with a series of large withdrawals to TerraUSD from the Anchor Protocol, a kind of decentralized bank for crypto investors.

Meanwhile, TerraUSD was sold against stablecoins backed by traditional assets through various liquidity pools that contribute to the stability of the peg, as well as through cryptocurrency exchanges. The sudden influx spooked some traders who started selling TerraUSD and Luna.

A reserve fund of about $3 billion in bitcoin and other cryptocurrency resources owned by the Luna Foundation Guard has been depleted amid emergency efforts to rescue TerraUSD, according to the fund’s dashboard. Analysts and traders said that the sale of the fund contributed to a sharp drop in the price of Bitcoin earlier this week.

write to Kaitlin Ostroff at [email protected]