The current collapse from the once third-largest stablecoin, TerraUSD (UST), has elevated questions regarding other fiat-pegged tokens as well as their capability to maintain their pegs.
Stablecoins’ stability under consideration
Stablecoin firms declare that all of their issued tokens is supported by real-world and/or crypto assets, so that they become an important component within the crypto market, supplying traders by having an alternative to park their funds between placing bets on volatile coins.
They include stablecoins which are supposedly 100% supported by cash or cash equivalents (bank deposits, Treasury bills, commercial paper, etc.), for example Tether (USDT) and Circle USD (USDC).
In the other finish from the spectrum are algorithmic stablecoins. They aren’t always supported by real assets but rely on financial engineering to keep their peg with fiat money, normally the dollar.
However, following a collapse of UST—an algorithmic stablecoin, that stability has become doubtful.
The distrust has brought to massive outflows from both asset-backed and algorithmic stablecoin projects. For example, the market capital of USDT has fallen from $83.22 billion on May 9—the day which UST began losing its U.S. dollar peg—to $72.49 billion on June 2.
USDT drifted from the one-to-a dollar parity while suffering outflows, although briefly. Regrettably, that isn’t the situation with algorithmic stablecoins many are still buying and selling below their intended fiat pegs, as discussed below.
USDX
USDX, the Kava Network’s native “decentralized” stablecoin, was well known for mostly buying and selling $.02–$.04 cents underneath the dollar. But, it moved farther away from its near-perfect peg using the greenback among the TerraUSD debacle.
At length, USDX dropped to the cheapest level on record—at $.66—on May 12. The USDX/USD pair continues to be trying to reclaim its dollar peg since and it was altering hands for approximately $.89 on June 2, as proven below.
Concurrently, USDX has observed outflows worth $60 million since May 9, illustrating that traders are redeeming their tokens.
Kava Labs, the event team behind Kava Network, noted that USDX lost its dollar peg because of its contact with UST among its collaterals. Meanwhile, a decline across USDX’s other reserve assets, including KAVA, Cosmos (ATOM), and Wrapped Bitcoin (WBTC), also shook its stability.
1/ $UST has (clearly) considerably de-pegged and it has promulgated a hazard to downstream protocols which use it. The UST risk in Kava is isolated and could be tolerated with current system parameters.
— Scott Stuart (@Scott_Stuart_) May 11, 2022
In May, Scott Stuart, the co-founder and Chief executive officer of Kava Labs, asserted that USDX would retain its dollar peg once they flush UST from their ecosystem.
VAI
Vai (VAI) is yet another victim from the ongoing stablecoin market rout.
The algorithmic stablecoin, built around the Binance Smart Chain-based Venus Protocol — a lending platform, traded for $.95 this June 2. However, like USDX, the token is well known for buying and selling below its intended dollar peg since launch.
Related: DeFi protocols launch stablecoins to lure new users and liquidity, but do you use it?
For example, in September 2021—long prior to the TerraUSD’s collapse, VAI had dropped as little as $.74. Additionally, the depeg scenario happened after Venus Protocol endured a $77 million loss on bad financial obligations in May 2021 because of large liquidations in the lending platform.
The marketplace cap of VAI was $272.84 million in May 2021. But following the Venus debt fiasco, along with TerraUSD’s collapse, VAI’s internet valuation dropped to just about $85 million, suggesting a considerable plunge in the demand.
Some stable exceptions
Dai (DAI), an algorithmic stablecoin indigenous to Maker—a peer-to-contract lending platform, performed extremely well versus its rivals, never fluctuating too much from the guaranteed dollar peg despite the fact that witnessing a 20% loss of its market capital since May 9.
FRAX and MAI, other algorithmic stablecoin projects, also maintained their dollar peg during TerraUSD’s crash.
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