TerraUSD (hereinafter referred to as "UST"), the world's third largest stablecoin, has seen a free fall in price in just one week, making the now ironic term "stablecoin" out of the circle.

What is a stablecoin?

　　UST is an algorithmic stablecoin issued by a South Korean company called Terra, whose value is pegged 1:1 to the U.S. dollar.

UST is not pegged to the U.S. dollar through U.S. dollar assets such as cash or bonds, but is anchored by issuing a token called Luna. Investors buy Luna coins in fiat to hold UST.

　　The stablecoin works as follows: If the price of UST falls below $1, investors can “burn” UST, i.e. permanently remove it from circulation, in exchange for $1 worth of Luna coins, which reduces the supply of UST and reduces the Boost its price; conversely, if UST rises above $1, investors can “burn” Luna coins in exchange for $1 of UST, which increases the UST supply and pushes its price back toward $1.

In theory, the market will spontaneously carry out arbitrage through the above two operations, which objectively helps maintain the anchoring relationship between UST and the US dollar.

However, when the market encounters severe fluctuations, this stable mechanism that spontaneously adjusts supply and demand will fail, and with large-scale runs, the stablecoin is no longer stable and falls into a "death spiral".

　　According to CoinGecko, a cryptocurrency data platform, the entire stablecoin market is currently worth more than $160 billion, and the USDT issued by Tether is the world’s largest stablecoin, with a market value of about $80 billion.

　　Xiaoka (pseudonym), a senior user in the currency circle, said in an interview with the first financial reporter that before the collapse of UST, Terra promised to investors that the annualized return on the purchase of Luna coins was close to 20%, so it attracted a large amount of money to enter the market and speculated high The price of Luna coin has

soared from less than one dollar at the beginning of 2021 to nearly $120 in April this year, and the market value of UST has ballooned to $18 billion.

　　Until May 8th, local time, both UST and Luna coins began to plummet. Luna coins only took a week to return to zero. By the 13th, the price of UST fell to 10 cents, a drop of 82% in the past 24 hours.

　　So, how did the UST collapse happen?

Xiaoka told the first financial reporter that the currency circle called the incident a deliberate attack by "the currency circle Soros".

　　In 1997, Soros first borrowed a large amount of Thai baht, and then suddenly sold a large amount of Thai baht in the market, causing the Thai baht to plummet. The central bank of Thailand tried to use its foreign exchange reserves to buy baht. The fixed exchange rate regime collapsed, culminating in a sharp devaluation of the Thai baht.

　　Xiaoka said that on May 8, Terra temporarily pulled out part of the UST liquidity due to the need to adjust the UST fund pool, resulting in a short-term drop in UST liquidity. The price of UST deviates from $1, and the decoupling event immediately triggered large-scale panic selling by UST holders, causing the price of UST to fall faster and automatically triggering the execution of the destruction mechanism between UST and Luna.

　　"The price of UST falls, investors run on UST, convert it into Luna, the supply of Luna increases, the price drops sharply, and then the sell-off of Luna holders is triggered...

This forms a 'death spiral'.

The value of UST is based on the real value of investors .

Gold and silver buy Luna to support, once the value of Luna is gone, the value of UST will no longer exist.” Xiaoka explained.

　　Stablecoin shocks affected mainstream cryptocurrencies. On the 12th, Bitcoin once plummeted to around $25,000, hitting a new low since the end of 2020. Ethereum dropped to $1,700, and the market value of the cryptocurrency market evaporated by $200 billion in a single day.

　　Xiaoka said that Terra had previously purchased $3 billion worth of Bitcoin and Ethereum as reserve assets for the UST project to mobilize funds and maintain UST price stability when the de-anchoring triggered a sell-off.

In this event, the above-mentioned funds, along with the funds of UST and Luna holders, have been burned.

As for the true face of "Solos in the currency circle", Xiaoka said that people in the currency circle generally speculate that it is a mainstream financial institution on Wall Street. It is reported that Citadel, one of the top ten hedge funds in the world, launched the financial attack. .

The last time the agency was out of the circle was back to the retail investor war on Wall Street in February 2021.

　　After reviewing the beginning and end of the UST crash, Xiaoka concluded that the bears used two points to successfully attack stablecoins.

“The first is to use Terra to perform liquidity shifting operations, shorting UST and Luna in the contract market;

second, cryptocurrencies are increasingly correlated with U.S. stocks, the Nasdaq is deep in a bear market, and the market’s bearish sentiment has reached extremes, resulting in A slight drop in cryptocurrency prices can trigger a downward herding effect.

”

　　As of the 13th, the Nasdaq fell 27% from its record high set in November last year, and in the past six months, the market value of the cryptocurrency market has been wiped out by one trillion US dollars.

Both bitcoin and ethereum hit new highs in November last year, climbing above $67,800 and $4,800 respectively. Today, both prices have fallen 58% and 60% from their all-time highs.

　　"

In front of traditional financial giants, digital currency has exposed its biggest weakness, that is, all actions are recorded in the chain, and all transactions are open to the public, which is a clear sign, while traditional financial institutions are in the dark and can strategize.

However, digital currency is still an experimental industry, I believe that there will be innovations to solve the problems exposed in the future, and this incident will have a profound impact on the currency circle." Xiaoka said.

　　U.S. Treasury Secretary Janet Yellen expressed concern about the incident. She again called on Congress to regulate stablecoins at a congressional hearing on the 10th, saying that legislation is imminent.

“I think stablecoins are a fast-moving product that poses a risk to financial stability and we need a consistent legislative framework.”

　　Last year, a regulatory panel led by the U.S. Treasury Department recommended that Congress enact legislation to regulate stablecoin issuers similar to banks, and Yellen said it would be appropriate to complete the legislative goal this year.