These stablecoins rely on complex algorithms to ensure their price stability. The algorithm system lowers the number of tokens when the price goes down and issues new tokens when the price exceeds the value of the asset it is pegged to. The most popular algorithmic stablecoins are FEI, Magic Internet Money, Frax, etc.
In May 2022, the number of Google searches containing the word “stablecoin” jumped by 4 times. Such a sudden spike in the popularity of this term is impressive since the first part of this word, namely, “stable”, hints that this coin is not subject to fluctuations. So, what is the reason behind the tremendous hype around stablecoins? Let’s try to analyze.
As you know, among the myriad of cryptocurrencies there are tokens named “stablecoin.” Their key feature is fixed value. Investors can use them as an alternative for fiat or a link between various cryptocurrencies. According to CoinGecko, there are >80 stablecoins. The most popular ones are Tether, USD Coin, Binance USD, DAI, Magic Internet Money, Frax, etc.
UnStablecoins or stablecoins?
All these stablecoins have different mechanisms behind them and, generally, may be divided into three main groups:
- Backed by fiat. The projects behind these stablecoins declare having fiat reserves equal to their market capitalization. The most popular fiat-backed stablecoins are Tether and USD Coin (USDC);
- Backed by crypto. These stablecoins are backed by other cryptocurrencies and are issued to launch the underlying asset on other blockchains. Cryptocurrency-backed stablecoins are a more decentralized version of fiat-backed virtual assets. The most popular stablecoins backed by crypto are WBTC, DAI, EOSDT, etc.;
- Backed by no real assets but rather “a special algorithm” (algorithmic stablecoins). These stablecoins rely on complex algorithms to ensure their price stability. The algorithm system lowers the number of tokens when the price goes down and issues new tokens when the price exceeds the value of the asset it is pegged to. The most popular algorithmic stablecoins are FEI, Magic Internet Money, Frax, etc.
The main purpose of stablecoins is to mitigate industry uncertainty. However, in May 2022, the words “stable” and “stablecoin” ceased to be synonyms.
UnStablecoins: TerraUSD crash case
Since its peak in November 2021, the crypto market has lost almost $1.8T in market capitalization. In May 2022, the industry has experienced serious panic due to the depeg (value dropped much below $1) of TerraUSD (UST) stablecoin and the associated crash of Terra Luna.
TerraUSD relied on a complex mathematical algorithm to maintain its dollar value and was backed by its sister-token Luna. When the market entered the panic phase, investors started selling UST and the project Terra did not have enough reserves to maintain the value of this stablecoin. When UST dropped, investors lost any confidence in TerraLuna.
Within 4 days (9-13 May), the market capitalization of TerraUSD dropped from $18B to $1B while the market capitalization of Terra Luna decreased even more sharply, from $23B to $0.5B. Following this crash, there were many posts made by crypto investors in which they admitted to losing a fortune. For example, $1.9M held by @TheMoonCarl in Luna are now worth <$50. One of the biggest investors in Luna was Binance and the biggest crypto exchange might have lost $1.6B as a result of Luna’s sharp drop. There were also many retail Luna and UST holders who lost much less than $1M, but for these people, their stake in Luna amounted almost to all their crypto fortune.
Terra collapse has made investors one more ask themselves: “what is the stability behind stablecoins? Are there any alternatives?”
Next stablecoin crash: is it possible?
The crash of TerraUSD has demonstrated to holders of other stablecoins that nobody can guarantee 100% stability of their assets. There is a serious risk that following the next depeg of any major stablecoin (even a few % depeg), holders of both major and minor stablecoins may consider converting their virtual assets into fiat to avoid the fate of TerraUSD investors. Anyway, the future of the crypto market and its stable segment heavily depends on the stability of the top 4 stablecoins – USDT, USDC, BUSD, and DAI, the total market cap of which exceeds $150B.
After TerraUSD depeg, investors pulled $10B from Tether, the largest stablecoin in the crypto world. Many algorithmic stablecoins have demonstrated some signs of volatility: FRAX ($2B mcap) fluctuated between $0.99 and $1.05; MIM ($1.8B mcap) fluctuated between $0.99 and $1.02; and FEI ($500M mcap) fluctuated between $0.97 and $1.05.
Tron announced the creation of a $10B reserve fund to back its own stablecoin USDD ($270M mcap). However, due to the lack of confirmations, Tron is unlikely to have amassed enough reserves.
Stablecoins are too unstable. So, what assets should I use to store my fortune during the crypto winter?
- Fiat. Althoughthis suggestion sounds quite simple for investors who have entered the crypto industry, fiat money, especially reserve currencies such as EURO or USD, will not disappear, at least in the foreseeable future. Fiat will not bring you visible profits but after the end of the crypto winter, you will have enough money to invest again in crypto.
- Precious metals such as gold. Wealthy individuals, central banks, and big corporations have traditionally stored a big share of their fortune in precious metals such as gold and silver. If you are seriously afraid of the crypto market uncertainty, investing in precious metals is a good option for you. In childhood, everyone dreamt of owning many gold bars. What about making this dream come true?
- Time. We all know that time is the most valuable resource and its market price depends on individual’s professional expertise. For example, depending on the country, the salary of a junior IT specialist may range between $500-$10,000 per month while a salary of a senior or lead blockchain developer can reach >$40,000 per month. Why does it matter to you?
An alternative to stablecoins
The company Hacken has introduced an alternative for stablecoins called ETD (Engineer Team Day) that is backed by the time of the company’s smart contract auditors. It is the solution for projects interested in keeping their assets in Web 3.0 even during the crypto winter. 1 ETD can be used to pay for 1 workday of Hacken’s smart contract auditors team. Even if the cost of labour jumps or any other circumstances arise, holders will get the same scope of services for their ETDs. Buying ETD allows crypto and blockchain projects to fix the cost of a smart contract audit at the time of purchase thereby making ETD a long-term investment.
Generally, the crash of one of the biggest stablecoins is a warning sign for every reputable crypto player and investor. The main concerns around stablecoins are lack of accountability and insufficient transparency and until these concerns are addressed, the question “Next stablecoin crash: is it possible?” will remain open.
Even if a next stablecoin crash does not take place, it is recommended to diversify your portfolio by adding some alternatives. Crypto projects with long-term plans may consider getting ETD by Hacken. Cybersecurity solutions will always remain in demand in Web 3.0 and the greater the users’ awareness of cybersecurity, the higher the demand for security testing.
About the author
Dyma Budorin is the CEO at Hacken, a Web 3.0 cybersecurity company. Dyma is a blockchain economy influencer who is actively promoting the development of the virtual assets market in Ukraine in cooperation with the Ministry of Digital Transformation of Ukraine. In 2021, Dyma became one of the top-55 Ukrainian IT entrepreneurs according to the reputable Eastern European media outlet.