What Does STABLE Mean Again?
TLDR: A Stable coin is supposed to be stable and not fluctuate price…
Merriam-Webster defines stable as:
1 a: firmly established : FIXED, STEADFAST
stable opinions
b: not changing or fluctuating : UNVARYING
in stable condition
c: PERMANENT, ENDURING
stable civilizations
2 a: steady in purpose : firm in resolution
b: not subject to insecurity or emotional illness : SANE, RATIONAL
a stable personality
Someone in the crypto community forgot to look up the definition before they coined that term for certain cryptocurrencies.
Stable coins are supposed to removed some of the volatility of the crypto market. ETHEREUM and BITCOIN can see price vary 20-30% in a few hours and that is a normal day for someone well-versed in the crypto space. The stable coin is pegged to some well known currency (think the $1, but can actually be any FIAT- The term is derived from the Latin word fiat, which means a determination by authority and means government currency like the $, €, or ¥ ). These stable coins are supposed to maintain the price of [$]1. There are varying ways of maintaining this “$1 peg”. But the consensus was that these stable coins, are —um, well —- STABLE. The coin will correct if any fluctuation occurs to maintain that $1.
So this is past weekend was a bit crazy in the crypto work(Friday the 13th -2022 -ominous right?) with LUNA/TERRA(UST). People not even involved with crypto know about the extreme volatility in the market. There was a reported $40 Billion (with a B) of lost value. I will give you a quick run down of the basics. Terra is a protocol to make and maintain stable coins in many FIATs, and was trusted… Watch this quick view (if it stays up) that is kinda funny now.
Terra is a company that focused on creating and maintaining STABLE coins. The company maintained the pegged FIAT by the use of their own cryptocurrency called LUNA.
This past weekend Terra/LUNA had a crash. UST (Terra Stable Coin) and LUNA lost a lot of value. UST supposed to be at $1 now (6:00AM Monday morning) – sits at around $0.12 and dropping… So no where close to the $1 peg it was supposed to be STABLE at.
So how do these STABLE coins stay stable. Some are actually backed with collateral of a reserve of greenbacks(US dollars) meaning every 1 stable coin can be redeemed for $1 (Tether and USDC) … Some are backed by other crypto (DAI)… Some like UST are not backed by collateral per-se, but instead called an algorithmic STABLE coin where the supply and demand of the pegged STABLE coin incentivizes the network of the sister token (LUNA) to destroy(burn) or make(mint) the UST to maintain price. The method is beyond the scope of this post, but if you want to read more check out this article on the topic. The moral of the story is that their protocol didn’t work and it was bad for LUNA, bad for UST, bad for any sorry individual that bought into either coin because of the false STABLE claims, and BAD FOR THE CRYPTO COMMUNITY AS A WHOLE.
Having something title a STABLE coin that is not stable is bad for the whole crypto system. It sows distrust in the system. Crypto at large is lucky that LUNA and UST were not large enough to cause the entire market to crash (more than it already is :/). While this might not be the death of crypto it is certainly a nail in the coffin for stable coins being pegged to a FIAT. I do not see any pathway without these getting regulated heavily.
People lost a lot of money. Some people lost everything on the bet and a claim that this coin is SAFE. There is no SAFE or STABLE in crypto. A coin can go to ZERO and that needs to be remembered. Crypto right now is not the place to put your all of your retirement funds, or your life savings. It is a place where all money is gambled. Yes in that gamble you could 10x or lose it all. If you gamble on it you need to be ok with that gamble being lost.
It is all fun and games until it goes to 0.