Most cryptocurrencies have drastically underperformed benchmark. During the Crypto Bear Market despite being long regard as an inflation hedge and a superior alternative to fiat currencies that are prone to devaluation. The cause liquidity pressures brought on by tighter monetary policy by central banks, especially the Reserve Bank of India (RBI) and the United States Federal Reserve (Fed) (RBI). Fiat money money that central banks issue that not backed by a physical good like gold.
The quantitative tightening, which aims to stop record inflation in the greatest economy in the world, has caused stock and cryptocurrency values to decline dramatically from their heights, eerily resembling the bear market cycle in 2017.
While Stablecoins like Tether (USDT) and USD Coin (USDC) smartly rebound after de-pegged from the US dollar, the Terra (UST) crash. Which destroyed billions of dollars’ worth of investor wealth, dispelled the notion that Stablecoins are stable.
Stablecoin
Stablecoins developed as a more stable alternative to other volatile cryptocurrencies like Bitcoin and Ether. They are far less volatile options for conducting business within the blockchain ecosystem. Because their values linked to other fiat or crypto currencies, commodities, or even financial instruments.
Although USDT and USDC make up around 80% of the stablecoin market, the panic brought on by the UST crisis caused USDT to lose more than $10 billion in market capitalization. With its market share increasing from 27% to 34% as a result, USDC greatly benefited.
These tokens, which were issued 1:1 with collateralized US dollar backing, have now stabilized at or near the $1 level as their issuers have taken steps to obtain extra collateral to offset any further selling pressure from uneasy investors.
What is a Crypto Bear Market
A extended period of time during which there is a large decrease in the cryptocurrency or stock market referred to as a bear market. A recession, high unemployment rates, political unrest, or a combination of any or all of these factors may be to blame. It’s crucial to understand the basic terminology traders and investors use to describe a bear market in order to be ready for one.
Liquidity Dangers
On the other hand, over-collateralized Stablecoins that rely on non-stablecoin cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH) as collateral, like Dai (DAI), Magic Internet Money (MIM), and Liquidity (LUSD), are still vulnerable to liquidity risks brought on by declining prices for these top cryptocurrencies.
The extra margin required to maintain the US dollar peg on these over-collateralized Stablecoins, which use BTC, ETH, or other derived assets as collateral, is likely to put additional downward pressure on the underlying cryptocurrency.
This finally has the potential to start a domino effect, as the UST crisis abundantly illustrated.
Liquidity
Even though the specifics of the UST meltdown are a little more complicated, it is clear that stablecoins need a lot of work before they can regain investors’ confidence.
Some Stablecoins, such as USDD, produced by Tron and whose main operations handled by the TRON DAO Reserve, have demonstrated improved stability while also providing investors staking the stablecoin with a 30 percent interest return.
Although retail investors can only trade the USDD stablecoin on the secondary market, all other activities. Such as token issuance and management, attributed to the TRON DAO Reserve’s approved white list rather than the underlying algorithm. This explains a significant portion of the strength of the TRON DAO Reserve.
Another strategy is demonstrated by the FRAX stablecoin, which employs USDC as collateral and Frax shares (FXS) as a value accrual and governance token that is purposefully volatile. According to its developers, FRAX is the first fractional-algorithmic stablecoin in the world.
Using Innovation To keep the Dollar Peg
FRAX is an example of how cryptocurrency entrepreneurs are experimenting with cutting-edge techniques to maintain the US dollar peg with increased stability. It offers better stability than a purely algorithmic stablecoin like UST, or Terra Classic (USTC) in its new incarnation.
Stablecoins are increasingly fostering the expansion of the decentralized finance (DeFi) space and will continue to draw more protocols that are vying to fill the void left by the UST crash, even though they are frequently chosen on the basis of the profitability on offer due to the incredible interest rates.
While it’s yet unclear how the full basket of Stablecoins will fare in the present bear market for cryptocurrencies, more price declines might seriously damage the very foundation on which these digital assets are built.
Financial regulators in countries like the United States and the United Kingdom are already considering legislative changes to make sure that current legal frameworks can contain risks related to the failure of companies issuing Stablecoins. They recognize the need for immediate regulation to prevent a repeat of the UST disaster.
It is still uncertain if issuers will eventually need to back their stablecoins with physical assets rather than other stablecoins or cryptocurrencies.
For Stablecoins to stand the test of time and establish their value in a Web3 environment, innovation and regulation will be necessary.
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