Technology

What are stablecoins and why the significant crash in the terra market?

Regarding the fall of the UST stablecoin in the market, which made Luna, a blockchain governance token earthlost almost 96% of its value, it is important to clarify why it generates so much noise in the crypto ecosystem.

Stablecoins or stable currencies (by their translation into Spanish) are a type of cryptocurrency that has a lower volatility when backed by other types of assets and that, as explained by Dan Westgarth, director of operations at Deel, combine the operational advantages of crypto with the price stability of money issued by banks.

“There are two types of stablecoins; there are collateralized ones, like USDT, also known as Tether, and some that are considered algorithmic, which can be tied to any fiat currency or to a metal”, said Jhon Torres Jiménez, economic analyst.

This type of cryptoactive plays an intermediary role between currencies such as the dollar, the euro, etc., and those that are digital such as bitcoin or ether.

In the first group of stable coins, a company is in charge of doing the collateralization; that is, that a dollar that comes out in the crypto world has a backing in the real world. For its part, the second set of stablecoins have an algorithm in charge of making all the parity with the dollar or any fiat currency.

“Not all stablecoins are falling, it is mainly UST, but these cryptos have always had falls, DAI fell a couple of years ago, USN fell this year, but UST, which is the one that is falling these days, has generated more noise because of the importance it had for the ecosystem,” said Torres.

Those that use algorithms have various forms of operation; making purchases of other crypto, burning tokens, among others. “In the case of Terra, 1 UST is tied to the blockchain, which means that if one of them is removed it is because a governance token is burned, in this case it is called Luna”, added the expert.

What happened to UST and Terra?

After the collapse of the algorithmic stablecoin of Terraform Labsit was announced that Terra validators stopped the chain to prevent governance attacks after severe inflation of their Luna token and “significantly reduced attack cost”, according to the official Twitter account.

It should be noted that governance attacks are a way to manipulate the blockchain to obtain enough governance tokens to get a majority vote.

Following the stoppage of the blockchain, Terra announced that validators would be applying a patch to disable delegations and would coordinate to restart the network in the following minutes. In addition, he assured that the network should come into operation once two thirds of the voting power were online.

The Terra blockchain has resumed block production.

Delegations are disabled now that the chain is live with the new code merge.

Validators, please check the Discord announcements for the latest patch notes. https://t.co/CGQgfMDWQe

— Terra (UST) 🌍 Powered by LUNA 🌕 (@terra_money) May 12, 2022

During that outage, there were no transactions on the Terra blockchain, which is why its token prices ground to a halt.

“UST was in the top 20 by MarketCap of crypto, it began to generate a lot of nervousness in the Terra ecosystem, it was tremendous because of everything that was tied up, people went out to sell trying to avoid losses, but it is very complicated”, concluded towers.

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