In the latest episode of Cryptopedia, Cointelegraph’s director of video production, Jackson DuMont, delved into the world of stablecoins. DuMont explored the concept of algorithmic stablecoins and also examined the recent incident involving TerraUSD (UST) and why it struggled to maintain its dollar peg.
According to DuMont, stablecoins are cryptocurrencies that are tied to an external asset, such as the United States Dollar (USD). He emphasized the importance of stablecoins in the crypto industry as they provide users with a means to store their assets without worrying about their value depreciating. This feature is especially valuable in bear markets where uncertainty is rampant.
DuMont used Tether (USDT) as an example to illustrate how stablecoins maintain their dollar pegs. He explained that for Tether to create or mint USDT, the company must hold an equal amount of USD in its reserves. This collateralization ensures that USDT users can exchange their stablecoins for USD whenever they desire. While stablecoins may be considered as “copies” of the original currency, DuMont highlighted one key difference – stablecoins exist on the blockchain.
In addition to discussing traditional stablecoins, DuMont also explored the realm of algorithmic stablecoins. These types of stablecoins do not rely on crypto or fiat money as collateral. Instead, they utilize smart contracts and intricate algorithms to manage the circulating supply and control the price. DuMont explained that in the case of Terra, the system failed and caused a significant market crash. Factors such as Terra (LUNA) minting contributed to UST falling below its peg, leading to a sharp decline in its price.
Overall, DuMont’s analysis provides valuable insights into stablecoins, shedding light on their significance in the crypto industry and the potential risks associated with algorithmic stablecoins.