UST and USDT Collapse Sends Shockwaves across Exchanges
UST lost its peg on May 9, 2022. Shortly after that, the USDT, the much larger and multi-billion Dollar cryptocurrency stable coin also lost its peg. This de-peg affected cryptocurrency exchanges a lot.
In this article, we will see how the exchanges are dealing with this the bed and why they are taking a step back in the evolution of currency.
The Terra LUNA Case
UST was designed to retain it back at $1 every time but that changed on May 9, 2022, when USD lost its pack for the first time. It regained its value and lost it again.
All of this happened when Terra blockchain sold its bitcoin reserves. Unable to find a proper backing for their stable coin, people began to sell UST which sent it into a death spiral. Subsequently, LUNA also collapsed within 48 hours.
Stablecoins Usage in Exchanges
Now stablecoins were supposed to be stable at $1 algorithmic stablecoins did not have sufficient backing like USDT which has reserves to back its value. but across exchanges table coins were valued equally.
The problem started when UST as a base of a trading pair(BTC/UST) lost its value and subsequently, the trade become unfavorable for an exchange. Exchanges had to delist UST and subsequently found the USDT de-peg too much to bear.
Unable to find any suitable alternative for the base of a trading pair many exchanges have started reversing back to the US dollar as a base for a trading pair.
Benefits of Using USD as Base
Now the US dollar has been one of the most stable currencies after the gold standard. It helps in true globalization and is the only reason it is very stable as compared to other currencies such as Euro, Japanese Yen, and Chinese Yuan. The following table shows its relative stability as compared to other currencies(as per the Dollar Index):
How did Exchanges Respond?
Exchanges have started adding trading pairs with the base of US dollars. Even those cryptocurrencies which were earlier trade-only are being offered in US dollar pairs. This makes it easy for users to come with US dollars and straight away buy their desired cryptocurrency. The following data shows how USD as a base year is high in demand now
Small exchanges like Bit.com and Bittrex have started offering US dollar base trading pairs. Even bigger exchanges like Binance and investing.com have started following suit. However, KuCoin a big trading exchange has not yet offered US dollar-based cryptocurrency pairs.
Conclusion
Algorithmic stablecoins do not have fundamental backing and therefore can be said as unreliable as a base of a trading pair. However, fully backed stablecoins as USDT has also shown that the de-peg is possible even in those cases. Hence, the US dollar seems the only viable option still any for the solution is reached.