The depeg of UST from the US dollar has heightened fears in the crypto community about the risks of a death spiral.
The panic surrounding TerraUSD (UST), the algorithmic stablecoin of the Terra blockchain ecosystem, could spread to other stablecoins.
According to cryptocurrency price monitoring platform CoinMarketCap, USDC, BUSD, TUSD and GUSD are the only stablecoins among the top 10 that maintain peg to the US dollar at a 1:1 ratio.
Other stablecoins, such as USDP, FEI, USDN, DAI, and even the most popular of all, USDT, are trading between $0,99 USD and $0,87 USD at the time of writing. In fact, USD Neutrino (USDN), another dollar-pegged algorithmic stablecoin based on the Waves blockchain, It is the second of its kind to lose its peg to fiat currency this week.
Although this is not the first time that USDN has become unlinked from the dollar, yesterday it fell to $0,83 USD per unit.
In light of the current risk and fears in the crypto community, journalist and crypto market analyst Colin Wu published a report on the potential risks of a death spiral in other popular stablecoins, such as USDT and DAI.
Classification of stablecoins USDT, DAI, UST and others
In his report, Wu explained that stablecoins like Tether (USDT), which is pegged to the dollar and backed by cash and equivalent deposits, and Dai (DAI), a highly collateralized decentralized stablecoin, do not pose the same risks as UST, although it is of course possible for these stablecoins to lose their peg to the dollar at some point and for various reasons.
Wu separated stablecoins into 3 main categories and indicated that USDT, USDC and BUSD belong to the group of centralized stablecoins, which are collateralized by fiat money and tangible assets.
On the other hand, he indicated that stablecoins like DAI belong to the decentralized and over-collateralized stablecoins, while algorithmic stablecoins like UST, USDN and FRAX, also decentralized, are from the group of stablecoins that are backed only by an algorithm and not by assets.
Due to their classification and certain differences, the blockchain analyst noted that stablecoins like USDT and DAI basically do not face the same significant risks of decoupling, at least not in the long term.
What is a death spiral and why did UST enter one?
A death spiral is the term the crypto community uses to refer to a bank run in the cryptocurrency industry, caused by a large drop in value in an asset and its subsequent massive selling by investors.
Other stablecoins, such as Waves' USDN, have gone through a death spiral. In March of this year, USDN lost its peg to the dollar after it began circulating rumors about Waves as a potential Ponzi scheme that would eventually collapse.
The decoupling of this stablecoin resulted in a 30% drop in the value of WAVES. As is happening with UST and LUNA, investors in this cryptocurrency were severely affected.
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