S for Stablecoin

Seventeenth edition of Web3 Alphabet

We are doing two words by the letter S because I could not find Web3 words from Q and R. If you think of any, please write back. Thanks.

As you can guess by the name, it is one of the stable crytocurrencies. To achieve this status of ‘stable one’, Stablecoin hitches its value to another currency, commodity or financial instrument.

For instance, if a Stablecoin’s value is hitched to Indian Rupee, its value will change with the changing value of Rupee. Much like an obedient toddler who follows the mother around.

Ofcourse crypto does not understand concepts like obedience. Hence, there are a couple of ways to maintain stability.

One way is to use cash reserves as collateral to ensure that each coin is backed by equal amount in Rupees.

Second way is to back Stablecoins by cryptocurrency reserves.

Third way is the use of algorithms that add or remove tokens from the market to ensure that the Stablecoin’s price is matched to the Rupee. If at any point, price of a Stablecoin gets higher than rupees, algorithm will add tokens to supply in order to bring it down and vice versa.

Interestingly, the infamous TerraUSD (UST) was using the algorithm method. Earlier this year, Terra Luna crash is estimated to have wiped out $60 billion from the crypto space.

What happened to Terra Luna?

TerraUSD (UST) and Luna are two sister coins originating from the same blockchain called Terra. UST coin was designed as an algorithmic stablecoin and other stablecoins (USDC or Tether) were fiat-backed (backed by government recognised currency like Rupee).

The value of UST was backed by its sister coin, Luna. For example, when Luna token's price was $85, 1 token could be traded for 85 UST. However, once UST lost its peg to the dollar, both Luna and UST crashed. The crash was so exponential that all crypto exchanges had to delist Luna.

CoinDesk has a good timeline of the Terra Luna crash, if you would like to know more: Link

That’s all from S for Stablecoins. If you recall any other Web3 terms starting from the letter S, please leave a comment and I will include them in later editions. 

Until next time!