Cointelegraph director of video production Jackson DuMont dissected stablecoins in the latest episode of Cryptopedia. DuMont also explored and explained algorithmic stablecoins and the recent incident involving TerraUSD (UST) and why it was unable to maintain its peg to the dollar.
DuMont defined stablecoins as “a cryptocurrency whose value is linked to a foreign asset such as the US dollar (USD).” According to Dumont, Stablecoins are very vital to the cryptocurrency industry as they provide users with the ability to store their assets without worrying about their value depreciating. This feature is useful in bear markets where there is a lot of uncertainty.
Using Tether (USDT) as an example, DuMont noted that stablecoins are able to maintain their pegs to the dollar by holding equal reserves. He explained that in order for Tether to create or mint any amount of USDT, the company must have an equal amount of USD in its reserves.
The existence of this collateral allows USDT users the ability to exchange their USDT for USD whenever they wish. This shows that stablecoins can only be “copies” of the original currency. However, DuMont highlights one of the biggest differences: stablecoins exist on the blockchain.
Aside from this, DuMont also touched on the topic of algorithmic stablecoins. The filmmaker explained that these stablecoins do not use any cryptocurrency or fiat money as collateral. Instead, these projects use smart contracts and complex algorithms to manage the circulating supply and control the price. According to DuMont:
“When the price of the stablecoin deviates below its parity, tokens from the circulating supply are burned. Conversely, when the price exceeds parity, tokens are minted.”
In the case of Terra, DuMont explained that the system failed and “the whole market collapsed.” Several factors, including the minting of Terra (LUNA), drove UST below its parity and snowballed, driving the price well below its highs.
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