So-called stablecoins are sending shockwaves through the cryptocurrency markets, wiping billions off their value, causing liquid cryptos such as Bitcoin to crash and people to lose their savings.
The two main stablecoins from the crypto project Terra have gone into free fall with some calling the incident a Ponzi scheme akin to collapse of Lehman Brothers which precipitated the 2008 financial crisis.
Stablecoins claim to be a relatively safe haven in the highly volatile crypto market. They are meant to be tied to a fiat currency and usually maintain a 1-to-1 peg with the US dollar. But recent events have proven that they are just as volatile as other cryptocurrencies.
The stablecoin TerraUSD, or UST, crashed almost completely at one point on Thursday and lost its $1 peg (€0.96) to the dollar, tanking to a low as $0.26.
Terra was ranked among the 10 most valuable cryptocurrencies and peaked at almost $120 (€115.28) last month.
Meanwhile, TerraUSD’s sister token Luna fell by more than 97 per cent on Wednesday, dropping below $0.22. By Friday, Luna collapsed to nearly $0.
How did the crash happen?
UST, created by Terraform Labs, is an algorithmic stablecoin, which means that instead of having cash and other assets held in a reserve to back its token, it uses a complex mix of code and Luna to stabilise the process.
Crypto is full of gullible people who are sure there’s a lot of money in Ponzinomics and they will get rich even though those other fools will lose their money.
“Luna was supposedly a governance token, which is a way to pretend that made up Ponzi money is not made up Ponzi money,” he told Euronews Next.
Things were made even more complicated after Terra’s creator Do Kwon purchased $3.5 billion (€3.3 billion) worth of Bitcoin to support UST in the event of a crisis.