![]() ![]() Algorithmic stablecoins are designed around the fact that stablecoins, like other cryptocurrencies, operate on blockchains-digital public ledgers operated by a community rather than a bank or government. The idea was to create a fully decentralized currency not ultimately backed by a centralized issuer of assets like the US government. It’s a currency backed by automated operations meant to maintain a stablecoin’s value by increasing or decreasing its supply. TerraUSD, however, took the third route, operating as an algorithmic stablecoin. Others, like MakerDAO’s DAI, maintain a reserve of cryptocurrencies rather than traditional money, but “overcollateralize”-hold reserves larger than the face value of their stablecoins to compensate for their volatility. That is, when a user pays Tether $1 for a token, that money is supposed to be held in Tether’s bank accounts. Tether and many other of the biggest cryptocurrencies maintain a reserve of cash or cash-equivalent assets whose value in theory matches the total value of the stablecoin in circulation. They maintain that peg in one of three ways. They’re typically pegged to another currency: both Tether and UST were designed to be pegged to the US dollar. The most popular stablecoin, Tether, can be exchanged for more than 4,000 other cryptocurrencies on centralized exchanges, according to crypto data firm Kaiko, making it one of crypto’s most traded tokens. They do that in two ways: by allowing crypto owners to conduct transactions without having to take volatility into account, and by offering them a safe haven for their holdings, protected from wild swings in the crypto market without having to convert their holdings into traditional money. Stablecoins are meant to be useful, not to make their owners rich by soaring in value. Its plunge has raised concerns that go beyond its narrow slice of the stablecoin world.Ī cryptocurrency designed to hold a steady value, in sharp contrast to the extreme price volatility seen for Bitcoin and other tokens. ![]() The biggest of those, TerraUSD, also known as UST, and its sister token Luna have melted down in spectacular fashion, sending their prices to near zero and their market values plunging to a shadow of the combined $60 billion they once commanded. Others have tried solutions that are far more complex. Some have used the equivalent of a digital vault to back up their promises. A branch of cryptocurrencies called stablecoins has been trying to replicate that kind of dependability in totally new ways. When you deposit $1 with a bank, you can be pretty sure you’ll get it back even if they do more with it than lock it in a vault, thanks to regulations developed over centuries. If you put $1 under your mattress, you know you’ll get $1 back when you go looking for it. ![]()
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