https://www.nytimes.com/2022/05/12/business/dealbook/terra-c…
headline
A Stablecoin ‘Death Spiral’
Some crypto insiders say they saw the implosion of TerraUSD coming. Other stablecoins could also run into trouble.
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Crypto insiders say they saw this coming. TerraUSD, or UST, is supposed to be a stablecoin — a type of cryptocurrency meant to be pegged to a stable asset — that should not fluctuate in price. UST was pegged to the dollar. To maintain their pegs, custodial stablecoins are backed by reserves like dollars, U.S. Treasury bonds or other traditional assets. UST, though, is based on an algorithm that encourages traders to maintain its value. But a big sell-off in Luna, a sister currency linked to UST, plunged UST yesterday to a low of 23 cents.
“Everyone knows that these algorithmic stablecoins aren’t safe,” said Ethan Buchman, a founder of Cosmos, a hub for blockchains, including Terra’s. “They have these downside dynamics. People call it ‘the death spiral.’”