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Why Terra is crashing — Quartz

Ponzi Scheme

Why Terra is crashing — Quartz

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The crypto economy is known for seismic price fluctuations. Prices of cryptocurrencies and non-fungible tokens (NFTs), blockchain-based digital assets, can swing wildly throughout the day. But the one asset that’s supposed to remain stable across the crypto ecosystem are stablecoins.

Stablecoins are tokens pegged to the value of a government-backed currency such as the US dollar or commodities such as silver or gold. Tether (USDT) and USD Coin (USDC), the two leading stablecoins, assure buyers of their stable value by promising to hold sufficient assets from the traditional financial system to match the value of outstanding tokens: cash, commercial paper, certificates of deposit, and Treasury bills.

But like all cryptocurrencies, stablecoins are largely unregulated and Tether settled a lawsuit with New York in 2021 over misleading claims about its reserves. Algorithmic stablecoins are even more complicated and, as it turns out, volatile.

Their value is assured not by financial collateral in the traditional markets but by lines of computer code. TerraUSD (UST) is the third-largest stablecoin by market capitalization according to CoinMarketCap and the largest algorithmic stablecoin. To maintain its value, it relies on a separate cryptocurrency called LUNA, which has a variable price. When the price of UST drops below $1, traders can burn UST—removing it for circulation—and raise the price back up. They are awarded the equivalent dollar in LUNA for doing so. But when the…

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