It is a known fact that the infamous real-estate bubble that destabilized the financial system in 2008 gave rise to the idea of a parallel economy. In addition, it gave rise to a digital financial ecosystem called ‘cryptocurrency’. It aims to be completely decentralized, not controlled by any financial authority. But on the other hand, cryptos are very volatile and so this was the major concern which led to the introduction of ‘stablecoin’.
Stablecoins are digital assets that are intended to be stable at $1, and they are backed by traditional external assets such as USD, gold, bonds, etc. Therefore, when issuing stablecoins, the par value of the traditional asset is kept as a reserve. This helps maintain the peg in case of a bearish market. However, while stablecoins were intended to protect the interests of traders, it is now used as a tool to manipulate markets and destabilize them when they are at their peak.
Therefore, Stablecoins in short was created to bring the cryptocurrency space and the traditional financial world closer and help traders swap their crypto during bear markets. But what if these stablecoins only occasionally lead to a bear market?
Can we still trust these stable coins which are currently decentralized but somewhat centralized? let’s find out!
Are Stablecoins Getting Centralized?
In the current crypto world, if assets are like investing in high risk stocks, stablecoins are like withdrawing cash from an ATM.
The crypto space has become more uncertain since the beginning of 2022 due to several external and internal factors. And so the adoption of cryptocurrencies by many businesses is currently waiting for more stability in them. This is when Stablecoins stepped in and made a huge noise. Moreover, after the popular March 2020 crash, people started to believe more in stablecoins and this was when the adoption numbers were skyrocketing.
This range of adoption has increased as 3 stablecoins, i.e., Tether (USDT), USD Coin (USDC) and Binance USD (BUSD) join the top 10 cryptocurrency list with a collective market capitalization of over $12 billion went. However, USDT has always remained the most traded asset every day, surpassing Bitcoin and Ethereum.
So, when stablecoins have become the core of the crypto space, what if it is also used as an attacking tool? Is it dangerous for the crypto space?
The recent occurrence of UST d-peg which is said to be predetermined raises concerns over stablecoin trading.
UST – The Stablecoin That Shook Up The Entire Crypto Space
Many of those who follow the crypto space are well aware of the recent UST D-peg event. For those who are new, the Terra Blockchain stablecoin UST has now lost its peg and fell below $0.1. And in an effort to keep the peg, bitcoin had to pay a heavy price. Since UST is not just a stablecoin, but an algorithmic stablecoin. Its peg to keep around $1 using some algorithm and LUNA circulating supply.
It seems that everything would have been in its place if the Terra Foundation had not deposited 80,000 BTC to support UST. This sparked a spark between bitcoin and ethereum giants, who tested the threshold for liquidating BTC reserves with Terra. So, as he had imagined, it happened.
As an anonymous trader dumped 283 million UST, he lost his peg. And to retrieve the peg, Terra empties all its reserves. So this resulted in a massive drop in BTC price, while UST failed to regain its peg. But the LUNA token has persisted and therefore is currently priced well below 10 cents. Interestingly, the collapse of UST prompted Tether (USDT) holders as well, as it also saw a significant drop in deep FUD.
What if US was backed by USD? Will Stablecoins Still Fall?
USD-backed stablecoins held their pegs throughout all phases of the bull-bear cycle. Mainly because of their claim to give back USD at any time against a USDT or USDC. But the stability of UST was dependent on Luna and vice versa. Therefore, even if BTC is backed by USD, it will experience a similar decline, but only on the first day when it drops to $0.76. However, it will get better in the next few days.
On the other hand, bitcoin and the crypto sector as a whole will not see a sharp decline. But it is also true that LUNA may not have achieved the fame it achieved just before the accident, as UST is the main player behind LUNA’s price rally. So, when a stablecoin with a market cap of over $18 billion faced dire consequences, what if a stablecoin with a market cap of over $73 billion could impact the crypto space?
It is time to think as Tether has become the backbone of the crypto space with the highest trading volume almost every day. And if someone shakes up the USDT routine in the FUD markets, the entire crypto space could be destabilized. Moreover, the markets may soon remain stable without any movement for some time.
How Central Bank Digital Currency (CBDC) Can Boost Bearish Markets
After mass adoption in the past few years, several governments around the world are regulating crypto. And hence creating a sense of fear among the traders. Let us take an example of India, where recently heavy taxes of more than 30% to 40% have been levied, which led to mass exodus of traders either from crypto or from India.
And to be safe, traders should focus their attention on CBDCs which are fully regulated and controlled by central banks. China has already deployed its CBDC in circulation called the Digital Yuan, which has affected BTC and the entire crypto space. Furthermore, in order to increase the adoption of CBDCs, the country further placed restrictions on crypto transactions and decimated the crypto space with its CBDCs.
In short, stablecoins is a very broad topic with many arguments and defenses falling under its umbrella. On the other hand, governments around the world are currently focusing more on bringing their CBDCs to the curb in the cryptocurrency space as quickly as possible. And in such situations, if attacks continue within the crypto space, internal and external factors could lead to some of the harsher conditions that critics dream of.