Can a Stablecoin Give 20% Annual Returns? Terra Lived a Lie Until it Died

Stablecoins have played significant roles in bringing stability to the crypto market

For those people who are highly interested in gaining exposure to cryptocurrency, but worried about rampant volatility, stablecoins have always been an ideal choice. Stablecoins are cryptocurrencies that are backed by an asset, most often a fiat currency. They maintain much of the appeal of other cryptocurrencies, however, allowing investors access to a new and evolving asset class. But recent Terra LUNA and TerraUSD crash made investors to reconsider their investment options.

What are the Best Stablecoins to Earn Interest On?

Stablecoins have played significant roles in bringing stability to the crypto market. These fiat-backed cryptocurrencies act as buffers to investors who engage in frequent crypto trades, enabling them to protect their funds against market volatility.

Over the past year, stablecoins have gained more adoption and application in the crypto ecosystem. With a combined circulating supply of over US$130 billion, USD-pegged stablecoins have increased by over 500% and are predicted to grow as more investors join the crypto ecosystem.

What changed after Terra and TerraUSD crash?

TerraUSD (UST) is the third-largest stablecoin by market capitalization according to CoinMarketCap and the largest algorithmic stablecoin. To maintain its value, it relies on a separate cryptocurrency called LUNA, which has a variable price. When the price of UST drops below US$1, traders can burn UST—removing it for circulation—and raise the price back up. They are awarded the equivalent dollar in LUNA for doing so. But when the price of UST rises above US$1, traders can burn LUNA and get the equivalent amount in UST. UST has some collateral in bitcoin, but mostly relies on its algorithm to stay pegged to the dollar.

The price dropped below US$1, and then fell further, igniting a mass sell-off, plunging the price of UST to a low of US$0.25 on May 11, though it has since risen to US$0.42 as of May 12. LUNA, the linked cryptocurrency, fell precipitously from US$116 in early April down to US$.0042 at the time of publication. As of May 12, the combined market capitalization of LUNA and UST was US$5.5 billion, down by 88% from the start of the month.