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Luna-Terra crash: A brief history of failed algorithmic stablecoins

A common notion is that stablecoins are not subject to crypto volatility, which makes them a more secure investment. But, Terra isn't the first stablecoin to fall. Here we list all failed stablecoins.

Terra luna bitcoin crash. Image of 'physical' bitcoins.Between January and March, the Luna Foundation Guard, or LFG, bought $3.5 billion of Bitcoin. (File photo)

The stunning fall of the Terra stablecoin made the overall crypto market unstable, wiping out more than $200 billion in the space. The value of Luna Terra plunged about 80 per cent, making the coins now almost worthless. It should be noted that stablecoins work on the supply and demand game. Any stable coin that is developed has to be backed by some collateral, to make its price stable.

There are three types of stablecoins: crypto-backed, where the token is collateralised by cryptocurrencies; fiat-backed, in which the token is pegged to either USD or Euro; and algorithmic coins that rely on algorithms to maintain their supply and demand, and maintain their price to a dollar. A common notion is that stablecoins are not subject to wild price fluctuations and overall crypto volatility, making them a more secure investment. This wasn’t the case with Terra, although, it isn’t the first stablecoin to fall. Here we list all majorly failed stablecoins.

Basis Cash stablecoin

Launched in 2020, Basis Cash (BAC), an algorithmic stablecoin quickly flamed out. It fell from $1 to $0.30 in January 2021. The token used something called a “seigniorage algorithm.” The creators behind BAC created two tokens: One stablecoin, and another token that is free to move like any other crypto. The idea was if the price of the stablecoin goes below $1, people who invested in the second token could buy the stablecoin at a discounted price, to keep the demand for the stablecoin ‘stable’.

Interestingly, Do Kwon, the CEO of Terraform Labs was one of the pseudonymous co-founders behind the failed algorithmic stablecoin Basis Cash, as per CoinDesk. Like Terra, BAC failed. The token could never achieve the dollar target as it was pegged to be.

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Empty Set stablecoin

Empty Set Dollar stablecoin was launched around the same time as BAC. Again, it used the same seigniorage algorithmic approach to maintaining price stability around $1. The approach relied on an incentivization mechanism to reward actors who promote stability within the protocol.

The failed stablecoin peaked at a market cap of $22.74 million. However, within months the token failed to maintain its price to the dollar and plummeted to less than $0.01.

Iron Finance stablecoin

Iron Finance stablecoin was the first partially collateralized coin and launched in June 2021 with the main goal to be dollar-pegged and be used for DeFi applications.

The DeFI backed coin had two cryptocurrencies under its belt – Iron and Titan. Like Empty Set and Basis Cash, Iron was a stablecoin and Titan a ‘normal’ crypto-token. Users could either buy or redeem Iron tokens and then get them exchanged for Titan, for which they would be incentivised.

As more and more investors bought Titan, the price of Titan boomed. However, as soon as the ‘bubble formed, crypto whales dumped their tokens to realise profits—a classic case of rug pull. This caused a chain reaction and every retail investor started panic selling, which caused Titan and Iron to lose their peg. Interestingly, during that time billionaire Mark Cuban also lost a load of money and was quick to call for regulation in the space.

Several other stablecoins have similarly tumbled and never recovered including SafeCoin, BitUSD, DigitalDollar, NuBits, and CK USD. It is important to understand that Terra won’t be the end of algorithmic stablecoins.

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