Decentralized stablecoins (UST is UNPEGGED) - 10%to Steem-Database
Hello everyone,
I welcome you'll to my blog today.
It's no new information concerning the launch of USDD and its wave which mostly came as a result of its decentralized means of pegging which is different from the popular USDT and USDC but similar to that of UST which has an algorithmic and more decentralized means of pegging to the US dollar.
As much as this is a very nice development on stable coins as it helps to maintain complete decentralization, there are still some issues that I would like us to look into.
Currently, the UST has lost its 1:1 peg to the US dollar and it's now trading at 91 cents thus making it the second time in 3 years the decentralized stable coin is losing its peg to the US dollar.
The TerraUSD (UST) which was launched in 2020 by the Luna Foundation Gaurd has its price pegged to the US dollar by using about $10B worth of Bitcoin with an initial purchase of $3 billion worth of Bitcoin and Avalanche as a reserve for the UST.
Also, the UST works hand in hand with Luna to see its price kept at $1 by using an on-chain mint and burn technique.
One of the reasons behind this current drop in UST value is as a result of the massive dump of about $1.92 million worth of UST on the decentralized exchange Curve finance.
Following a general decline in the cryptocurrency market which has seen Bitcoin move from around $40k to where it is currently trading at $31,700.
Also, more tension was raised following an announcement made by the Luna Foundation Guard (LFG) which said that $1.5 billion Bitcoin will be loaned out to professional market markers which they claimed will be used in defense of the stable coin peg to the US dollar.
- See below
The above occurrence was interpreted to be an attempt of LFG in trying to leave its BTC position but further clarity has been made by the project founder Do Kwon who said that the incident shouldn't be interpreted as such but rather be seen as an attempt to increase the liquidity around UST peg.
As much as I believe what was said by the founder, It still does not nullify the fact that the on-chain burn and mint mechanism of Luna and UST isn't enough to hold the UST price pegged to $1 because the normal process involves trading $1 worth of Luna for 1 UST which is supposed to be $1 but with the price of UST currently trading below $1, the on-chain mint and burn mechanism is crippled and this could jeopardize the entire UST mechanism.
Similar to this, Justin Sun has made the native token of the Tron blockchain a reserve for the just-launched USDD stable coin.
This might lead to a future unpegging of the price to the US dollar if there should be a significant dump in the entire crypto market, especially TRX.
And that is my issue with decentralized stable coins because when the value of the reserve coins drops significantly, they tend to increase liquidity by trading the reserve balance which will lead to a temporary unpegging of the stable coin unless there's more mechanism applied which is sufficient enough to keep it pegged to the US dollar.
This is all I have to say for now on this issue.
See you next time..
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