TerraUSD Crash Shows Risks of Algorithmic Stablecoins

investopedia.com:

While TerraUSD (UST) stablecoin holders planned for their currency holdings always to be worth one dollar, a recent massive drop in the value of the cryptocurrency markets have led to a severe decline in value, touching a low of $0.30 on May 11, 2022. Here's a look at what happened, why this stablecoin was able to drop below its target value, and what investors can learn from the crash of Terra (LUNA) and TerraUSD.

TerraUSD is a stablecoin operating on the Terra blockchain. TerraUSD, which trades with the symbol UST, is always intended to be worth exactly one dollar, enabling transactions to process with predictable results and giving cryptocurrency investors and traders an option to store their assets in cryptocurrency without the risk and volatility associated with typical digital currencies.

However, sparked by a drop in overall cryptocurrency values, the UST stablecoin plunged in value beginning May 9, 2022. According to CoinGecko, the currency hit a low value of $0.298 on May 11.This is the opposite of what was supposed to happen. So why did TerraUSD fall? It was driven by the underlying assets that were supposed to give UST a stable price.

Stablecoins are digital assets intended to retain a fixed value compared to an underlying asset or currency. The most common stablecoins track the United States dollar, although there are stablecoins for other international currencies, including the euro, and stablecoins that track the value of gold.

Every stablecoin works differently and is managed by a different group or organization. In the case of TerraUSD, the currency is a part of the Terra ecosystem, which also operates the Terra (LUNA).

The TerraUSD currency is not backed by U.S. dollar-denominated assets. Instead, a