Despite a market capitalization of over $160 billion, Stablecoins luna and terra USD are sinking below $1. While the arbitrage mechanism that pushed the price higher failed to increase the price, a group of e-commerce platforms is pushing for their adoption. However, the price of Stablecoins remains volatile. While this is unfortunate, there are reasons for the sudden dip in the price.
Stablecoins luna and terraUSD sink below $1
As the price of TerraUSD falls below $1, investors are fleeing the stablecoin. There are two possible reasons for this. First, TerraUSD relies on traders to keep it above $1. When the price falls below $1, traders burn the tokens and exchange them for Luna, which raises the supply of the stablecoin and thereby lowers the price. According to the analyst Martin Hiesboeck, the situation is similar to a bank run.
Second, the collapse of UST has placed greater financial strain on certain decentralized finance projects. Both UST and Luna are used by those projects as capital reserves and for operational expenses. Two of these projects are built on the UST blockchain, such as Astroport. Since UST began to stumble, their token prices have plummeted by more than 80%. That means that investors are worried that their funds will be depleted in the coming weeks.
Stablecoin market is roughly $160 billion in market capitalization
While the stablecoin market is relatively small compared to the overall cryptocurrency market (which is now worth more than $1.2 trillion), it is growing in popularity and may soon cause ripples beyond the cryptosphere. The market is dominated by two main players, Tether and USDC. Both have seen widespread adoption, and Tether’s case as a world reserve currency is workable.
In the beginning of 2019, the stablecoin market was around $2.6 billion. It has been growing steadily ever since. In 2021, the market capitalization is projected to reach $160 billion. Despite the growing popularity, regulators are concerned that stablecoins pose a serious risk to financial stability. The US and China are both considering regulating payment stablecoins. For now, though, the market is still small, and there are still questions surrounding how they can impact financial stability.
Arbitrage mechanism failed to increase price of Stablecoins
A few weeks ago, the federal reserve issued its biannual Financial Stability Report, highlighting the problem of instability of illiquid assets like money market funds, and featured the upcoming emergence of stablecoins such as terraUSD and luna. The report cited a recent incident where the UST of terra fell 15% in 24 hours, and fans of the ecosystem wondered if the event was the result of a coordinated attack by a competitor.
The LUNA community recently voted to introduce a proposal to increase LUNA’s mintage by four times. This move would increase the supply of the LUNA coin, allowing holders to absorb them more quickly, and sell them more easily. While it is unclear if this will increase the price of terraUSD, it would certainly give the currency a much-needed boost.
Terra Alliance is a group of e-commerce platforms pushing for Terra adoption
The purpose of the Terra Protocol is to enable value transfers across borders and jurisdictions. It will bridge the chasm between traditional and decentralized economies and enable a new type of digital economy. The use-cases for Terra will include supply chain finance, global remittance, and insurance. As a decentralized asset, Terra will be capable of powering innovation in the field of money.
While Bitcoin’s price volatility has been a deterrent to widespread adoption, the Terra Alliance is attempting to bridge that gap. Several e-commerce platforms, including Alibaba, Amazon, and eBay, have joined the project and are pushing for adoption of this stablecoin. In addition to e-commerce platforms, Terra is backed by several capital investment arms of popular cryptocurrency exchanges. Those organizations have pledged tens of millions of dollars to support the Terra project.