The cryptocurrency market has tumbled this week, with Bitcoin hovering between $28,000 and $30,000 in the last two days – less than half of the all-time high reached in November – and Ethere a little over $2,000, which it is also less than half the value of its November peak. A significant portion of the blame is being blamed on a cryptocurrency called TerraUSD.
TerraUSD is one of the largest of what are called ‘stablecoins’, meaning it should hold a value close to that of a fiat currency – in this case, the US dollar. Cryptocurrency investors see stablecoins as a sort of checkpoint in the cryptocurrency game, “safe” places to store their investments when they are not buying into more volatile currencies. And yet, this week the value of TerraUSD has dropped to 30 cents at its lowest level, and is now still just above 80 cents. How FastCompany pointed out, TerraUSD “typically fluctuates by only thousandths of a percent.”
Unlike other stablecoins, TerraUSD is pegged to a cryptocurrency rather than directly to the fiat currency with which it must maintain parity. In the case of TerraUSD, it is tied to Luna, which is built on the same blockchain. TerraUSD and Luna reserves are algorithmically created and destroyed to maintain their relative value, bouncing less than a penny in either direction to be worth buying and selling – with trades between them also helping to stabilize their value.
Until this week, when the value of Luna has dropped by more than 75%, dragging the value of TerraUSD with it. At that point, TerraUSD creator Do Kwon opened up his reserves, the $3.5 billion worth of Bitcoin he bought to support TerraUSD, and sent a shockwave through the already volatile cryptocurrency market. As Reuters reported, Crypto Assets Lost $800 Billion in Market Value in One Monthand the Wall Street Journal pointed out that NFT sales are decreasing also.
As for why Luna’s value dropped, that’s unclear. CoinDesk attributes to “a series of large withdrawals from the Anchor Protocol”, a market for stablecoin trading, as well as large TerraUSD withdrawals from the Curve stablecoin market. conspiracy theories about being an “attack” that was “deliberate and coordinated” spread throughout the cryptographic community.
Meanwhile, it was revealed that before creating TerraUSD, Do Kwon co-founded a failed stablecoin called Basis Cash, under the pseudonym “Rick Sanchez”, named after the Rick & Morty character. Which is honestly a perfect cap to put the whole baffling thing on.