Terra’s UST stablecoin started a hard decline last Monday. Little is left of the dollar impersonator. At the time of writing, one UST token is worth only 12.3 cents, instead of 100 cents. It has become the topic of the week. VegaX cofounder Sang Lee has his say on the situation and what is important about stablecoins.
Perception is the most important
That writes Cointelegraph, who spoke to Lee. He is the co-founder of VegaX, a financial services company within the cryptocurrency industry. He declares that trust is much more important than collateral, or collateral, for stablecoins. That has to do with the peg, or linkage, which must be preserved, Lee said. Once this fixed price can no longer be held, it is downhill for a token like UST. That’s because the value the token has after the peg is disputable afterwards, regardless of whether or not there is collateral. So it’s about perception.
Still, the way the peg is preserved is also important, says the CEO. If that works, then there is little reason at all not to trust the stablecoin. After all, it’s worth the same. Pegs can be preserved by coming up with draconian measures, such as banning transactions, but that would directly reduce trust.
Tether and other stablecoins
UST is far from the only stablecoin that is vulnerable. According to CoinGecko, there are currently 81 stablecoins, many of which are not 100% dollar-backed. There’s a lot of risk there. Tether (USDT) is the best-known example of this. The USDT issuer is often criticized for not being clear about whether there is enough collateral. That means USDT could suffer the same fate as UST, which is exactly what appeared to be happening yesterday. Then the token already decreased in value. This problem has now been resolved.
This principle does not only apply to the crypto world. For example, fiat currencies such as the Hong Kong dollar and the currency of Aruba has a value equal to the dollar. The principle has been used for decades, maybe even longer. So it can go well for a long time. However, TerraUSD’s (UST) situation clearly indicates that we need to be very careful.