UST unanchored Terra out of control? Let’s take a look at the evolution history of stablecoins

TerraUSD, the fourth-largest stablecoin and the 10th-largest cryptocurrency by market cap, experienced a massive sell-off over the weekend, with its price dropping to 69 cents on Monday, according to CoinMarketCap. Terra’s Luna Foundation Guard (LFG), responsible for the security and stability of the project’s ecosystem, subsequently sold its $1.3 billion Bitcoin reserves to restore LUNA to parity with UST, bringing cryptocurrencies and Bitcoin itself Huge selling pressure.

Like other stablecoins, TerraUSD is designed to be some sort of safe haven for cryptocurrency investors, and its price is designed to be pegged at $1. However, TerraUSD (or “UST”, an algorithmic stablecoin designed to maintain a one-to-one peg to the U.S. dollar) differs from traditional stablecoins in that, as an algorithmic stablecoin, it is not necessarily backed by any asset, but relies on A suite of financial engineering to maintain the link to the US dollar. But there are huge risks in this design. Algorithmic stablecoins rely on traders to push the price back to $1, and if traders are unwilling to buy, the currency will fall into a “death spiral.”

Terra founder Do Kwon said in a tweet on Tuesday that “he is about to announce a recovery plan for the stablecoin.”

UST unanchored Terra out of control? Let's take a look at the evolution history of stablecoins

So, how will stablecoins develop in the future?

Let’s start with a string of the development of stablecoins so far, and the development direction we can see so far .

Stablecoin era before 2013-2017

Friends abroad and old irons who entered the market before 2018 should be no strangers to this word. Yes, before 2017, the stablecoin thing was ignored at all, and it can be said that there is zero sense of existence.

You may be wrong, USDT was released in 2015.

It is true, but the rise of USDT started from the support of the three majors in the second half of 2017. What was it like before that?

In the pre-stablecoin era, Bitcoin was the “exchange medium” for all currencies, while foreign compliant trading platforms have always supported direct recharge and purchase of fiat currencies.

2017-present The era of  fiat- collateralized stablecoins

UST unanchored Terra out of control? Let's take a look at the evolution history of stablecoins

Tether USD is the full name of USDT, and the Chinese name is Tether. The issuer Tether listed USDT on Bitfinex and Poloniex in 2015. As a stable currency, Tether promises that there is a dollar worth of cash or equivalent behind every USDT to support the value of USDT.

USDT only became popular in the second half of 2017, after the three major trading platforms launched USDT and opened USDT trading pairs.

In the first half of 2017, USDT only printed more than 10 million. At the end of 2017, it quickly increased to 1 billion. Now you look back at the wave of mad cows at the end of 2017. Do you know how it came about? The soaring of BTC at the end of 2017 has a great relationship with the crazy printing of USDT.

USDT has experienced many credit crises in the past few years. Users are mainly worried about whether there is a sufficient 1:1 USD margin in TEDA Bank and compliance issues, but they have basically passed through each time.

Now it has issued 80 billion US dollars, and it has continued to occupy the first position of stablecoins. From the earliest BTC chain, it has gradually expanded to ETH, TRX, Algorand, OMG and other chains.

Later, everyone saw the business opportunities in the stablecoin market, and major institutions issued their own stablecoins. For a time, various USDX occupied people’s vision, including the current second largest USDC, and later TUSD, PAX, GUSD …

At present, USDT is undoubtedly the best in the circle. The trading platform supports trading pairs, the scale of issuance, and the number of public chains are all huge advantages. In terms of going out of the circle, the best one is USDC, which has strict audits and fully complies with supervision…

2018-Present The Era of  Cryptocurrency Collateralized Stablecoins

Cryptocurrency-collateralized stablecoins are basically DAI’s one-man show. Although there are many other projects trying to copy or improve MakerDAO, so far it can be said that no project has achieved even the slightest threat to DAI. USDX is far less of a threat to USDT.

In the field of cryptocurrency-collateralized stablecoins, if you understand DAI, you will basically understand all stablecoins of this type.

It is completely different from the style of currency supported by USDX and USDX, DAI is basically supported by ETH (now DAI can have multiple encrypted collaterals, including BAT, OMG, etc. To simplify, we use The first single mortgage ETH to introduce).

Maker relies on the game of ETH mortgage and arbitrageurs to achieve relatively stable prices. For example, for an ETH of $1,000, you mortgage 1ETH to open a CDP (collateralized debt position) and then receive 700DAI. If you want to get your 1ETH back in the future, you will have to repay 700DAI.

If the price of DAI drops to $0.9, the CDP owner can buy 700 DAI at a price of $630 to repay the loan, making a net profit of $70. If the price of DAI rises to $1.1, then the user can directly sell the 700 DAI in hand for 770 US dollars, the same profit of 70 US dollars.

However, DAI has several problems:

1. The capital utilization rate is not high.  Because ETH is anchored instead of US dollars, and the price of ETH itself fluctuates greatly, it can only be over-collateralized, resulting in a capital utilization rate of only about 60-70%, which limits the capital utilization rate, which is also the birth of Lien and others to improve capital utilization The direct cause of the rate of stablecoin projects.

2. The arbitrageur game model mentioned above is actually not always so effective because of the existence of over-collateralization. Because USDT is 1:1 mapped to USD, the arbitrageur game model can work perfectly, which is why the volatility of DAI is far greater than that of USDT. This topic is fully covered in a whole article, so I have covered it here.

3. When ETH plummets, the clearing system is affected by the current performance of ETH, which is prone to problems. 312 At that time, because the black swan ETH price plummeted in an instant, there were many cases of 0 yuan winning the auction in liquidation. As a result, there was bad debt in the Maker system, and the shortfall exceeded US$500 W at one time. Later, Makerdao had to issue additional MKR to repay the debt.

Due to the existence of these reasons, although DAI is the absolute No.1 in the cryptocurrency-collateralized stable currency, it is also difficult to expand. In a few years, there will only be a total issuance of several billion, which is similar to USDT. Tens of billions of stablecoins still have an order of magnitude gap.

2020 –
The Era of Algorithmic Stablecoins  So Far

UST unanchored Terra out of control? Let's take a look at the evolution history of stablecoins

Regarding this track, various projects are frantically intervening, such as USDD recently issued on TRX, USD issued by NEAR, etc.

What caused the project Fomo to rise is UST, which has recently fallen into a death spiral.

The core design idea of ​​Terra ecology is how to expand the usage scenarios and payment requirements of the stable currency UST, and the operation of UST adopts a dual Token design:

Luna, a token for governance, staking and verification; UST, a native dollar-pegged stablecoin.

The simple understanding is that every time a UST is minted, one dollar worth of LUNA must be burned, and LUNA helps maintain the pegging of UST to the dollar through an arbitrage mechanism:

Whenever the UST exhange is higher than the peg, the user can send LUNA worth 1 USD to the system and receive 1 UST; conversely when the UST exhange is lower than the peg, the user can send 1 USD worth of UST to the system to get 1 USD LUNA.

In both cases, users are incentivized to arbitrage, thereby helping to maintain the peg between UST and the US dollar. The stablecoin design of this dual-token arbitrage and the typical over-collateralization requirements can easily occur when the crypto market experiences severe volatility. A tragic mass liquidation event.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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