The Terra algorithmic stablecoin TerraUSD (UST) collapsed in May, causing billions of dollars worth of losses for investors. The collapse lowered investor confidence in algorithmic stablecoins, but the CEO of the world’s largest exchange, Binance, has a different opinion. Changpeng Zhao said that algorithmic stablecoins still had a position in the crypto space.
In an interview with decrypt’s gm podcast, Zhao said that he was not pleased with the events that followed the depegging of UST. He said that the Terra team was weak in its response. Zhao also does not believe that any stablecoin is risk-free, adding that top stablecoins like Tether (USDT) and Circle (USDC) were not free of risk.
Zhao said that the failure of one algorithmic stablecoin did not mean that all other similar stablecoins would fail. On the other hand, he also admitted that algorithmic stablecoins had a higher risk level than fiat-backed stablecoins.
Stablecoins are stable cryptocurrencies. For instance, stablecoins like USDT and USDC are pegged to the value of $1. Despite the volatility of the broader cryptocurrency market, stablecoins are not supported to go below their pegged values.
Fiat-backed stablecoins maintain their peg by being backed by fiat currencies such as the US dollar or the euro. However, algorithmic stablecoins maintain their peg using an algorithm built within the protocol instead of using specific assets to back the coin.
While speaking about algorithmic stablecoins, Zhao said that they posed a different kind of risk. Algorithmic stablecoins are backed by other volatile assets. Therefore, the risk posed by such assets was significantly high.
The collapse of Terra UST’s stablecoin
The co-founder of the Terra Luna network, Do Kwon, was once one of the biggest names in the crypto sector. Terra LUNA was also a top 10 cryptocurrency before the collapse, with a market cap of more than $30 billion. However, after collapsing in May, both LUNA (now LUNC) and UST collapsed to $0.
The collapse of UST has made stablecoins a popular topic in crypto. The collapse has also attracted regulatory attention, with regulators in the US and Europe discussing how these assets can be best regulated to protect investors. Stablecoins account for a large percentage of the global crypto market cap, and their failure can affect the entire space.
