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Executive Summary
While relatively new, the stablecoin market expanded rapidly in early 2021, growing from US$12.2 billion in July 2020 to US$109.3 billion in July 2021. While today in 2022, the stablecoin market is equivalent to US$155.5 billion. It is thus no surprise that stablecoins have received so much attention from regulators over the past 6 months.
A stablecoin is a type of digital asset (cryptocurrency) designed such that its value is tied (pegged) to another currency, commodity, or financial instrument. Originally, stablecoins were developed to serve as a potential substitute of fiat currency, to minimize the price volatility of cryptocurrencies which made them “less suitable for wide use transactions.”
They are currently used as a bridge between crypto and traditional money, facilitating the
on/off chain, but also for crypto trading, via cryptocurrency trading pairs - such as bitcoin - tether or ether - tether.
To provide some context on stablecoins, more generally, and the events leading to UST crash that occurred in May, we herein briefly present/discuss:
A broad overview of the four main types of stablecoins, which differ in their ways of maintaining their peg: fiat-backed, crypto-backed, algorithmic, and commodity-backed.
An explanation of UST’s pegging mechanism.
A detailed timeline of events that contributed to the crash of UST, the fall of Terra, and [some of] the impact on other stablecoins.
The stability (or lack thereof) of stablecoins.
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