The World's Best Stablecoin Has Advice for Newbies

tech.hindustantimes.com:

The celestial algorithm that keeps the moon in its orbit around the earth clearly works a lot better than the one that governed Luna and Terra. The cryptocurrency pair’s collapse last week has put a question mark on the very premise of stablecoins: stability.

TerraUSD, or UST, was pegged to the dollar not by holding reserve assets in the U.S. currency but by the logic of arbitrage — the day-to-day pressure on the fixed price of the cryptocurrency was meant to be absorbed by a change in the quantity of its sister coin, Luna.

When Luna was valuable — it touched an all-time high of $119 just last month — it could support UST. But once UST skidded off the peg, speculators knew that arbitrageurs would buy it on the cheap in the market and swap it for Luna using Terra Station’s protocol. The supply of Luna would explode and its price collapse.

Sure enough, on May 10, the market value of Luna dipped to less than half of UST’s capitalization, meaning there was no feasible way to redeem all UST coins at par, according to Amit Chaudhary, head of decentralized finance research at Polygon and Ganesh Viswanath-Natraj, a finance professor at Warwick Business School. From that point on, the demise of the peg became a self-fulfilling prophecy.

Does this meltdown imply that stablecoins can never be stable? Not really. It’s probably a warning against learning the wrong lessons from the world’s most successful stablecoin, one that has come out unbroken through multiple crises: the Hong Kong dollar.

Pegged to the US dollar for nearly four decades, the currency in the Asian financial center is a stablecoin, albeit of the paper variety. Most days it relies — just like UST — on arbitrage to hold its value at 7.8 to the dollar. But there are two key