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Demand for TerraUSD could impact Bitcoin.
Dreamstime
Stablecoins are supposed to be the boring tokens of crypto–designed to maintain a fixed $1 value. But one of the fastest growing stablecoins–TerraUSD–may be creating new risks for Bitcoin and the broader crypto market.
Stablecoins act like digital dollars in crypto markets–many traders use them as a kind of parking spot for cash between trades. The largest ones are USD Coin and Tether, making up a combined 70% of the $186 billion stablecoin market.
Right behind them, however, is an “algorithmic” coin called TerraUSD. In the past year, its market cap has soared nearly 870% to $17.9 billion, making it the third largest stablecoin.
Like its more traditional peers, TerraUSD aims to maintain a fixed $1 price. But unlike its larger siblings–which maintain dollar-based reserves equal to their circulation–TerraUSD holds its peg by giving traders an arbitrage opportunity every time its price deviates from $1.
Terra’s protocol allows traders to “burn” TerraUSD in exchange for a dollar’s worth of another cryptocurrency called Luna. The trade makes a profit when TerraUSD’s price falls below a dollar. It also works in reverse–preventing TerraUSD from rising above a dollar.
With a few exceptions, the system has largely worked to keep TerraUSD at a stable $1 price.
Yet Terra’s backers appear to be going a step further to try and prevent TerraUSD from “breaking the buck.” Terraform Labs founder Do Kwon recently pledged to stockpile a gigantic amount of crypto, including at least $10 billion…
