Cointelegraph’s video production director, Jackson DuMont, delved into the world of stablecoins in the latest episode of Cryptopedia. DuMont explored the concept of algorithmic stablecoins and analyzed the recent incident involving TerraUSD (UST) and its struggle to maintain its dollar peg.
DuMont defined stablecoins as cryptocurrencies that are tied to external assets, such as the United States Dollar (USD). He emphasized the importance of stablecoins in the crypto industry, as they offer users a secure way to store their assets without worrying about their value depreciating. This feature is particularly valuable during bear markets when uncertainty is high.
To illustrate the concept, DuMont used Tether (USDT) as an example. He explained that stablecoins like USDT are able to maintain their dollar pegs because they hold equal reserves. In order for Tether to create or mint USDT, the company must have an equivalent amount of USD in its reserves.
The existence of these reserves gives USDT users the flexibility to exchange their stablecoins for USD whenever they choose. This demonstrates that stablecoins are essentially “copies” of the original currency. However, DuMont pointed out a significant difference – stablecoins exist on the blockchain.
In addition to traditional stablecoins, DuMont also delved into algorithmic stablecoins. These types of stablecoins do not rely on crypto or fiat money as collateral. Instead, they utilize smart contracts and complex algorithms to manage the circulating supply and control the price.
Regarding the Terra incident, DuMont explained that the system failed and had a detrimental impact on the market as a whole. Factors such as Terra (LUNA) minting led to UST falling below its peg and subsequently driving its price far below its previous highs.