Algorithmic stablecoins have had a rough year, starting with TerraUSD (UST) depegging to zero and the subsequent blow-up of Terra’s LUNA token, which was used for the asset’s backing. Algorithmic stablecoins are not fully collateralized and rely on different mechanisms to maintain their peg to a fiat currency, making them inherently fragile during market volatility.
The UST implosion created a domino effect that caused another stablecoin, Magic Internet Money (MIM), to depeg. Despite the fragility of algorithmic stablecoins, new projects like Djed by Cardano are still planning on launching, but that doesn’t mean that the concept has improved since the crises seen earlier in the year.
Let’s look at the latest depeg event in the cryptocurrency space.
Warning issued for WAVES and its USDN stablecoin
On Dec. 8, the Digital Asset eXchange Association (DAXA), which consists of the five major crypto exchanges in Korea, issued a warning about Waves and its WAVES (WAVES) token.
The warning comes after the stablecoin USDN, which is backed by WAVES, depegged and has thus far failed to reestablish the $1 peg in more than 180 days. This means that the USDN protocol may liquidate WAVES through an automatic arbitrage process in an attempt to regain the peg. On Dec. 8, USDN was 16% below the peg.
The move by DAXA to issue the warning has led Upbit to delist both WAVES and USDN. The delisting, combined with the DAXA warning, appears to be playing some role in the price decline currently seen in WAVES and USDN.
Algorithmic stablecoins are not alone in depegging. Constant concerns about Tether’s (USDT) backing and its general solvency continue to raise depeg fears among all levels of investors.
Over the years, USDT has lost its peg but never to the extent seen with UST and USDN.
As the community continues to reel from algorithmic stablecoins, regulators are taking notice and placing priority on regulating the space.
The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.