Stablecoin stability and regulation

in partnership with

NRI - Nomura Research Institute

Logo of NRI - Nomura Research Institute

Founded in 1965, Nomura Research Institute (NRI) is a leading global provider of system solutions and...

View more
ESG
Q+
02/01/2023 Article
profile picture of Ken Katayama

Ken Katayama

NRI - Nomura Research Institute

Senior Chief Researcher

TerraUSD debacle

In early May 2022, the stablecoin TerraUSD (UST) suddenly crashed, losing its peg to the US dollar.

I define “stablecoin,” a term without a clear consensus definition, as a store of value and/or medium of exchange that aims to maintain parity with a fiat currency and is used on a permissionless blockchain. I classify stablecoins as fiat-backed, crypto-backed or algorithmic based on the mechanism by which they seek to maintain a stable value. Fiat-backed stablecoins are backed by safe financial assets such as bank deposits or government bonds and guaranteed by their issuer to be redeemable on demand. Crypto-backed stablecoins aim to maintain a stable value through overcollateralization with cryptoassets in accord with an issuance protocol. Algorithmic stablecoins rely on arbitrage against other cryptoassets to maintain a stable value.

UST was an algorithmic stablecoin. Specifically, it was structured to maintain a stable value through arbitrage against LUNA4), a second cryptoasset governed by the Terra issuance protocol. The Terra ecosystem attracted capital inflows by developing various UST-based services, including the Anchor lending/borrowing protocol, which offered a 20% APR to lenders. However, whales drove down UST’s value by liquidating their holdings. In response, arbitrageurs exchanged UST for LUNA, leading to massive LUNA issuance. In other words, the mechanism that was intended to maintain a stable exchange value between UST and LUNA ended up triggering a hyperinflationary death spiral.

Want to keep reading?

Become a Qorus member to get access to all our insights

Related news & insights

Insurance
20/05/2024 News

Marsh introduces insurance solution for EU crypto-asset service providers

This solution is designed to help providers comply with the Markets in Crypto-Assets Regulation (MiCA), which will take effect on...

Digital Reinvention
15/05/2024 Article

Financial innovation spotlight: May 2024 edition

We have selected five new innovative projects that we found particularly interesting. A world tour that takes in France with...

Digital Reinvention
14/05/2024 News

Nirio launches Premio with FDJ: Simplifying everyday banking

Since January 2023, Nirio's payment solution has allowed individuals to pay for daily expenses in nearly 10,000 partner stores approved...

Open Finance
14/05/2024 News

Cwallet introduces zero-fee transactions for IDR and crypto trading

This innovative development aims to transform the way users interact with both fiat and digital currencies, enhancing their trading experience...

Insurance
08/05/2024 Study

The future of healthcare: Transforming the pathway to wellness

In the swiftly evolving domain of healthcare, advancements in technology and innovation are fundamentally altering the landscape of wellness. From...

Digital Reinvention
07/05/2024 Article

Huawei's Intelligent Finance Summit 2024: Empowering banks

We're excited to announce Huawei's Intelligent Finance Summit 2024, happening in Shanghai from June 5th to 6th, 2024.

ESG
05/05/2024 News

Sezzle introduces Payment Streaks: A BNPL gamified approach to financial responsibility

Sezzle, a leading Buy Now, Pay Later (BNPL) solution, has launched Payment Streaks, a new feature designed to reward consumers...

Insurance
02/05/2024 Article

Vote now to decide on the 2024 Innovation in Insurance Awards winners!

Discover the nominees for the 9th Innovation in Insurance Awards and vote to crown the best.