How the Stablecoin Landscape is Diversifying After the TERRA LUNA and UST Collapse

The post How the Stablecoin Landscape is Diversifying After the TERRA LUNA and UST Collapse appeared first on Coinpedia - Fintech & Cryptocurreny News Media| Crypto Guide

Like a film trick, set in slow motion Terra’s stablecoin — UST and native coin, LUNA witnessed a colossal crash. Thus, shocking investors to the bone marrow. Why? Because, although cryptocurrencies are highly volatile, stablecoins are perceived as the master of all, free of volatility. 

In this article, we shed light on what stablecoins were before TerraUSD’s collapse, stablecoins’ landscape after the collapse, and how top crypto exchanges are using trading pairs to diversify the stablecoins’ market as risk management. 

But first, let’s begin from the top— Terra, to understand better.

Terra, LUNA, and UST: What are they? 

Terra is a decentralized blockchain, which has a native coin, LUNA token (for all transactions and voting on the blockchain), and stablecoin, TerraUSD or UST, which is pegged at 1-to-1 US dollars. The UST was an algorithmic stablecoin because instead of having fiat currency or other stable assets in reserve to back its token, it used a mix of codes and LUNA (through a mint and burn mechanism) to stabilize the process.

Such that $1 worth of LUNA could be burned to mint 1 UST, and 1 UST could also be burned to mint $1 worth of LUNA.

How UST collapsed

The price of UST dropped to $0.91 after more than $2 billion worth of UST was suddenly unstaked (from the Anchor Protocol) and sold. Consequently, investors began burning UST to mint LUNA but exceeded the daily 100 million limit. Once the stablecoin failed to retain its peg, it ignited panic selling of UST which further plummeted its price from 0.5 to 0.3 to 0.2 then to an all-time low of nearly 0.0.

Prior to this rude shock in May 2022, Terra ranked among the top 10 cryptocurrencies at a swell rate of $120 and a market cap of more than $40 billion in April. 

Meanwhile, the unprecedented collapse of TerraUSD poked a hole at stablecoins to query how safe they are amidst the market crisis.

What are Stablecoins?

Stablecoins are cryptocurrencies designed to offer price stability by pairing them to a stable asset — precious metal or fiat currency, in most cases US Dollars. They offer security, low risk, and “were” volatile-free.  Such that, for a stablecoin pegged at 1:1 to dollars, you can exchange 500 tokens of that stablecoin for 500 USD at any time. 

However, note that the UST was unlike other stablecoins such as Tether (USDT) and USD Coin (USDC) because it was an algorithmic stablecoin backed by a complex mix of codes and its sister token, LUNA rather than dollars.

The landscape after the crash

Since cryptocurrencies are correlated, the colossal LUNA crash massively shook the cryptocurrency market with a loss of $60 billion (€55.8 billion). 

Tether USDT, also dropped to as low as $0.98 instead of its $1 peg while other cryptocurrencies such as Bitcoin and Ether lost substantial sums too. 

In addition, Tether USDT came under fire as critics questioned its reserves and the number of dollars backing it.

Crypto exchanges embrace stablecoin diversification

Stablecoin diversification is key to protecting trading portfolios. Some crypto exchanges have added USD trading pairs to existing USDT pairs. This mitigates the risk of liquidation and creates a list of preferred options for savvy traders. Some of such crypto exchanges are:

1. Binance — Binance is among the top crypto exchanges with a varying range of products. The Binance platform is dedicated to increasing the freedom of money for users. It has trading pairs such as ADA/USD, BTC/USD, ETH/USD, SOL/USD, DOGE/USD, XRP/USD, and BNB/USD among others on its platform. 

2. Bit.com — Bit.com is a high-performance crypto exchange that’s built with institutional-grade security to serve both new and experienced crypto traders. 

The exchange added 14 new trading pairs such as AAVE/USD, BTC/USD, BCH/USD, COMP/USD, CRV/USD, ETH/USD, and AXS/USD, etc to its platform.

3. FTX — FTX is a worldwide cryptocurrency exchange featuring innovative products like derivatives, options, and leveraged tokens. It supports more than 300 cryptocurrencies with pairs such as AVAX/USD, FTT/USD, MATIC/USD, FTM/USD, GST/USD LOOKS/USD, and APE/USD.

This strategy provides traders who are skeptical about stablecoins following TerraUSD’s failure with better alternative pairings on these exchanges. It’ll also ensure diversification and stability of the stablecoin market.