How Terra’s Collapse Will Impact Future Stablecoin Regulations

The demise of the Terra ecosystem, which later decreased its algorithmic stablecoin, TerraUSD (UST) value before plummeting to a record low of $0.30, has raised doubts about the next steps for not only algorithmic stablecoins but also all stablecoins.

The stability and success of UST were closely linked to its sister, LUNA, which offers arbitrage opportunities that could theoretically ensure that UST’s price remains stable. If the price of UST drops to below $1, it may be sold in exchange for LUNA, which reduces the amount of UST and increases its cost. If UST’s value exceeds a dollar, LUNA could be exchanged in exchange for UST, increasing the quantity of UST and reducing its cost. If the conditions are normal and everything works as it should, it creates an incentive and mechanism to keep the cost for UST around $1.

Although algorithmic stablecoins aren’t typically supported by assets like other stablecoins however, the company responsible for the development of UST and the larger Terra ecosystem is Luna Foundation Guard (LFG); Luna Foundation Guard (LFG), however, has set up an arsenal that includes Bitcoin ( BTC) to use to cover the eventuality that UST is depegged from the United States dollar. The idea is that if the price of UST falls dramatically, the BTC could be loaned to traders who will use it to purchase UST and then push prices back up and repegging it back to dollars.

When UST plunged into a massive drop, LFG deployed more than $1.3 billion worth of BTC (42,000 coins at $31,000 per) in exchange for the trader who planned to use it to purchase UST and create demand pressure and increase the value of the UST. But, it wasn’t enough to save the collapsed ecosystem from itself, and the spiral effect ultimately sank the value of the LUNA token and its stablecoin.

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