There are a few flavors of stablecoins out there, notably tether (USDT), USD coin (USDC), binance USD (BUSD) and dai (DAI). Also quite notably, we had terraUSD (UST). These are the five largest stablecoins and they represent roughly $160 billion of value. Three of these stablecoins (USDT, USDC, BUSD) are collateralized stablecoins issued by centralized entities. These entities own a treasury of dollars that back each coin so that each coin can be redeemed for $1 by the holder from the issuer.

OK, naturally, you’re thinking that the mechanism broke or something. It didn’t break. It worked as designed and you can see that if you look at the amount of LUNA that has been issued as the protocol tried to algorithmically bring UST back to $1 while LUNA’s price was also tanking.

That’s right. The total supply of LUNA went from about 725 million tokens on May 5 to about 7 trillion on May 13. Meanwhile, LUNA lost 99.9% of its value. This is what hyperinflation looks like.

What exactly happened doesn’t really matter. What really matters is that when something bad happened, Terra couldn’t handle it. What really matters is that an undercollateralized, algorithmic stablecoin will fail no matter how long it succeeds.

Spot on. Even if you’re like me, a bitcoin maximalist praying for the day where we go back to just one cryptocurrency, you have to admit that we are going to see more crypto in more industries in the short to medium term. Except next time an undercollateralized, algorithmic stablecoin fails, it’s not going to be $40 billion of lost value. It might be $400 billion. That could be catastrophic. We should look to avoid that scenario at all costs.

On the bright side, somehow bitcoin didn’t completely collapse. Over 80,000 BTC from that almost $4 billion treasury was potentially sold (we can’t yet confirm if the bitcoin was actually sold, but it was sent to exchanges) during the mad dash to get UST back to $1. That caused a price reaction, sure, but then again, the broader crypto market sold off because bad things were happening to a big crypto project (LUNA was once the 10th most valuable cryptocurrency). Add on the tenuous macroeconomic environment and general risk-off sentiment in the market, and it feels almost impossible that bitcoin still boasts a market cap of over $500 billion.

I think we are numb to these large numbers given the unprecedented bull market of the last 13 years, and so this bears repeating. Bitcoin was a worthless, purely peer-to-peer version of electronic cash created by an unknown person in 2009. No big company or government put marketing, research or legal dollars behind it, and yet it is now a serious macro asset that important politicians and financiers feel the need to comment on.

This content was originally published here.

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