There is no shortage of drama in crypto. A big part is being instigated by among other factors, volatility. However, in the recent few weeks, LUNA and UST’s spectacular (painful) collapse have been dominating headlines. At one point, LUNA was one of the most valuable DeFi projects, with over $32 billion in market cap.
Understandably, its creators had a grand vision for pushing crypto adoption through synthetic stablecoins that track the value of some of the world’s leading fiat currencies.
The LUNA and UST collapse exposed the Multi-Billion Dollar Crypto Industry
It worked like a charm until Terraform labs launched the UST, an algorithmic stablecoin bridged to Ethereum. Like every other stablecoin, the UST was, in theory, supposed to track the greenback while governed by LUNA. Its creators, led by Do Kwon and the now-liquidated Terraform Labs, appeared to have a better blueprint of DAI, describing UST as the next big thing.
The only problem is that the UST was tied to the performance of LUNA. According to how the UST algo functioned, every $1 of UST could be converted for the same amount in LUNA. There was also a burning mechanism for every LUNA converted to UST. According to the creator, Arbitrage was supposed to keep UST prices tethered at $1 USD, subject to demand and supply.
The fall of LUNA and UST
However, what later emerged was that UST could only maintain its USD peg if LUNA prices were in an uptrend. Therefore, when fissures began appearing in the crypto market, forcing Bitcoin below $40k and later $35k, there were concerns that UST would not hold its peg.
Do Kwon and his team bought BTC and other liquid currencies, including BNB and AVAX, as a cushion once they realized that UST wasn’t sufficiently backed. These tokens were supposed to shore UST, acting as a second safety net if LUNA prices continue to dump. The task of reserve management was bestowed on the LUNA Foundation Guard (LFG).
Against their anticipation, the crypto market continued to sell-off. It was further accelerated by FUD that UST wouldn’t hold the peg. Their liquidation for LUNA and further conversion to other stablecoins as USDT and USDC exposed a major fundamental flaw in UST and LUNA.
This hemorrhage, holder fear (and dumping), coupled with tireless bears, is what broke the camel’s back. By mid-May 2022, UST and LUNA collapsed, sending reverberations across the crypto sphere, heaping significant pressure on BTC.
LFG had to liquidate their crypto holdings, of which most (over 90 percent) were in BTC. Over 52k BTC was dumped to the market, forcing prices to new 2022 lows and shaving off over $200 billion in market cap.
In the end, the UST and LUNA collapse became an avoidable disaster that placed crypto back in the lens of critics and shed a bad light, providing fodder for those who would bash the innovation.
One can hope that cryptocurrencies work as they are advertised and designed. Many are still guided by the original guiding principles propositioned by Satoshi, revolving around decentralization, security, and financial inclusion. Terra had a plan, but observers said the launch of the UST steered them from their original virtuous path.
Do Kwon is now being sued by victims and accused of tax evasion in South Korea. In the U.S a regulated company lost over $42 million of clients’ funds when the UST de-pegged and the high yield that was promised proved to be unsustainable.
USDT Temporary De-Pegged, Crypto Remains Fragile
With LUNA and UST reduced to ashes, USDT became the next focus. Its operations are considered opaque by most critics. For a brief moment after UST went down, the USDT de-pegged (dropping as much as five percent from $1), causing jitters, and mass conversion to USDC, another stablecoin. USDC and USDT operate differently compared to UST.
Although technically both serve the same function acting as a refuge during turbulent times, especially in a bear market, USDC and USDT are issued by a centralized entity. Instead of algorithms, a trusted firm issues coins on a smart contracting platform like Ethereum or Algorand, for instance. Each coin in circulation, in theory, is supposed to be backed with a similar amount in cash.
Over the years, USDT has grown to be the largest by market cap, topping over $83 billion in May 2022. Currently, trackers show that USDT has a market cap of around $74 billion, a reduction partly due to the FUD around UST and fears that it could be the next, wreaking havoc in the sphere.
USDT may serve a critical role in crypto. However, there are trust issues due to Tether Limited Holdings’ failure to have a globally recognized top-four audit firm like Deloitte audit its reserve. Circle, the issuer of USDC, does the same and publishes its audit reports for the public to assess.
To calm nerves, Tether Holdings Limited published an assurance report by an independent accounting firm on May 19. The report suggested that USDT was overcollateralized. The issuer was gravitating more towards safety by sizing down on commercial papers for the U.S. Treasuries. This report was welcomed, but the community wants more.
Considering Options, why SigUSD on Ergo is a Cut Above the Rest
Overall, the risks associated with either undercollateralized algorithmic stablecoins or risks brought by trusting a centralized issuer could be bypassed by going back to the basics. This is what the creators of the SigmaUSD protocol on the EUTxO smart contracting platform, Ergo, are doing.
The SigUSD stablecoin of the SigmaUSD protocol is algorithmic, with its supply controlled by open source, audited smart contracts. It is decentralized, overcollateralized, immutable, crypto-backed, and strategically designed to be robust regardless of crypto market conditions.
Most importantly, the creator’s of this unique stablecoin protocol are guided by a conservative monetary policy – this is what separates SigmaUSD from other stablecoins. SigUSD is trustlessly issued, launched on-chain, and is non-custodial. Holders of SigUSD don’t have to trust anyone or any entity. Besides, SigUSD is sufficiently backed and overcollateralized by between 400-800% by a pool of ERG coins held in a smart contract.
The ERG is funded by ERG-SigmaUSD traders and those trading ERG for the reserve token, SigRSV. The value of SigRSV is calculated by factoring in the total number of ERG in reserve, the circulating supply of SigRSV, and the spot rates of ERG. The ERG pool is designed to stabilize SigUSD at any time and absorb ERG’s volatility due to the overcollateralized ratio. Since launch, the stablecoin has successfully maintained its peg to the USD despite the crypto bear market, which saw the prices of ERG drop from $19 to $2.
With a focus on decentralization, transparency, and a sound, conservative monetary policy is why SigUSD is superior to existing stablecoins. As the crypto community is aware of the risks posed by stablecoins, they will gravitate towards transparency and trustless operations, features offered by SigUSD and the SigmaUSD protocol on the Ergo blockchain.