Cryptocurrencies are highly volatile, making it difficult for holders to preserve asset value. It’s safe to mention that digital assets are a great way to transfer money to friends/family in different countries. However, sending cryptocurrencies has numerous risks due to rapid price changes. This made it necessary for experts to create a cryptocurrency pegged to a real currency. One of the most significant advantages of fiat currency is stability. Fiat is stable even over a long period. However, excessive paper money printing can affect its value in the long run. The American dollar is one of the most popular fiat currencies due to its stability and acceptance. Many stablecoins, such as Tether, have been pegged to the USD, making them more stable. Stability also makes them an efficient way to preserve value, especially when sending USDT abroad.
What is USD Tether (USDT)?
USDT is a popular stablecoin on numerous blockchains, including Ethereum and Tron. The primary purpose of Tether is to mimic the USD, so even when the dollar grows in value, USDT also grows. According to the company, there is a $1.0 in reserve for every USDT, reducing the dollar in circulation. This also ensures scarcity, helping the token remain valuable. This digital token has a market cap of $80.46 billion, making it one of the biggest assets in the space. USDT has faced numerous controversies, particularly regarding the dollar reserve. Owned by iFinex, the US sanctioned it for lying about reserves. In 2021, the US crackdown on stablecoins, particularly the company behind Tether.
Authorities fined the stablecoin creator $41 million for misrepresenting the dollar reserve. While stablecoins have reduced the risks of holding cryptocurrencies, the market remains unregulated, which may put users at risk. It came into the market in 2014, and has always stated that every issued token is 100% backed by fiat. Authorities found out this was misleading and fined the creator. When iFinex first launched Tether, it was only on the Bitcoin network. But with the growth of the digital asset space and the new ecosystems available, Ethereum, Solana, Tron, and Bitcoin Cash all host this coin. Only Bitcoin and Ethereum tops Tether in market cap, making it the third-largest. Despite Tether’s controversial past, it remains one of the most used stablecoins.
How Does Tether Work?
Tether works as a stablecoin, which means that it guards against volatility. If you need to pay for a product, you can send Tether to the recipient. This way, it protects the recipient from market changes affecting coin price. While Tether also provides backing for Euro and Yuan, the USDT is still the most significant market. Traders convert profits to USDT to secure them. Investors buy USDT, which they convert to their preferred asset. Tether owns a corresponding reserve to ensure that the value remains stable. Other cryptocurrencies stand alone, with their prices always moving according to speculation. If traders believe that a coin will become valuable, they buy more, which drives the price. Stablecoins don’t work this way. No one holds stablecoins to expect rapid price growth, but they buy them because they preserve value.
These cryptocurrencies are similar to fiat because they share some common principles. People don’t expect money to grow in value, but this happens, especially with a nation’s economic growth. Similarly, these crypto types also grow when their corresponding fiat gains value. Tether has continued to retain value, but an incident happened on May 6, which led to Tether falling to $0.97. This is the same issue affecting UST that led to $LUNA falling 99% from its price. Since then, LUNA has remained unstable, leaving holders in distress. While UST has retaken $0.99, LUNA is still far from its previous price point. The sudden price change has a connection to the billions of new LUNA minted. Traders who made purchases in the weeks before the crash are agitating on social media platforms for the coin to make a quick jump.
What Is UST?
TerraUSD is also a stablecoin on Ethereum pegged to the American dollar. UST is one of the numerous stablecoins in the space with one purpose—to guard against market volatility. Unlike USDT, UST does not have the backing of a Dollar reserve. Instead, a corresponding $1.0 worth of LUNA automatically burns anytime a trader mints UST. Due to the latest price crash, UST and LUNA have been on the news, which wiped out millions of dollars from investors. While the stablecoin was supposed to maintain 1 to 1 peg with the US dollar, it is still losing value rapidly. TerraUSD fell from $1.0 and currently trades at $0.197. Due to recent happenings, many exchanges have delisted the asset.
One of the significant reasons for UST’s price loss could be rapid sell-offs. Holders are afraid that the coin will continue to drop, causing financial losses for holders. Traders fear that the firm may sell off its Bitcoin, causing more panic in the asset space. While LUNA and UST have maintained some stability, investors are unsure of the future for the ecosystem. Do Kwon, a Korean developer and a co-founder of Terraform Labs, spoke on the recent changes. He said he was heartbroken that UST and LUNA lost almost all their value.
The co-founder also spoke about a revival plan to help the ecosystem. Talking about the revival plan, he said that the UST coin might be abandoned entirely. After, they plan on forking the chain and compensating some of the people who lost their money in the price fall. The businessman explained that UST had failed and could no longer be rebuilt and that the crash had destroyed the trust in the stablecoin.
Will Tether Collapse Like UST?
Some people believe that Tether may also suffer the same date as TerraUSD. While this is not totally impossible, it’s largely unlikely. Tether is backed by fiat money one a 1:1 for each USDT in circulation. Because of how developers made Tether, it won’t be easy to lose value like UST. Tether has existed since 2014 and has suffered a few controversies, but it remains one of the most purchased cryptocurrencies. It might still have its value if UST was backed by a real-world asset like the American dollar. However, the LUNA incident shows that any cryptocurrency can go to 0, especially with a faulty foundation. Tether’s stance and reputation make it a trusted way to preserve asset value, but anything can happen in an unregulated market. The stablecoin market has no regulations, so holders should keep this in mind while holding Tether or any stablecoin.
Conclusion
UST and Tether are both stablecoins that retain an asset’s value. Both cryptocurrencies suffered recent price falls that almost wiped out all of UST’s value. While Tether has returned to $0.99, the incident shows that rapid sell-offs may also affect stablecoins. LUNA is certainly is worst hit as it trades around $0.0004—a wide drop from $84, which it was some weeks back. It’s unlike for Tether to fall like UST, but it’s not entirely impossible.
