<span style="font-weight: 400">Stablecoins are a type of digital currency. The developers designed them to maintain their value over time and linked them to a fiat currency, usually the US dollar. In this configuration, one unit of cryptocurrency equals one fiat currency unit. In contrast to extremely volatile cryptocurrencies such as Bitcoin, the value of stablecoin is constant.</span>

<span style="font-weight: 400">However, due to recent events in the stablecoin market, like the crash of TerraUSD, the government is actively investigating this sector. Treasury Secretary Janet Yellen has stated that stablecoins </span><a href="https://www.businessinsider.in/cryptocurrency/news/janet-yellen-says-risks-related-to-stablecoins-are-growing-very-rapidly-but-theyre-not-yet-a-real-threat-to-financial-stability/articleshow/91526971.cms"><span style="font-weight: 400">threaten financial stability</span></a><span style="font-weight: 400">. In addition, the Federal Reserve issued a paper condemning the lack of transparency and regulation in the stablecoin market.</span>
<h2><strong>What are Stablecoins?</strong></h2>
<span style="font-weight: 400">Stablecoins are cryptocurrencies that have their value connected to another asset. Most of the time, the other asset is fiat money, such as the US dollar or the euro. The coin's value remains stable over time, at least in proportion to its linked currency. This is because the underlying asset's value remains constant. In some ways, it's as if the underlying asset, such as a dollar, has been transformed into a computer file.</span>

<span style="font-weight: 400">They back up stablecoin by the asset to which it links because they aim to track an asset. A company that produces a stablecoin, for example, will regularly set up a reserve with a financial institution that owns the asset on which the stablecoin is based. Most cryptocurrencies, such as Bitcoin and Ethereum, have no backing. Unlike stablecoins, the prices of these other cryptocurrencies fluctuate dramatically because people trade to profit.</span>
<h2><span style="font-weight: 400">Downtown Ripples Affecting The Crypto Economy</span></h2>
<span style="font-weight: 400">A popular token has lost 99 percent of its value, bringing a so-called "stablecoin" down with it. This has caused havoc in the cryptocurrency markets. For example, the</span><a href="https://www.cryptoknowmics.com/news/terra-luna-circulating-supply-increases-by-nearly-1-9-million-percent"> <span style="font-weight: 400">Terra Luna</span></a><span style="font-weight: 400"> token reached a price of $118 (£96) last month. However, it was only worth $0.09 as of 5th May 2022. In addition, the crash had an impact on the stable linked token TerraUSD.</span>

<span style="font-weight: 400">And now, investors are fleeing major crypto-currencies, sending markets into a tailspin. Stablecoin developers strive to keep them at the same value as assets such as the US dollar so that one token is worth $1. However, according to Coin Market Cap, a trading website, TerraUSD fell to $0.05 on 5th May 2022. The most popular stablecoin, Tether, also decoupled from the dollar and hit a new low of $0.95.</span>
<h2><strong>Could This Be The Effect Of Stablecoins?</strong></h2>
<span style="font-weight: 400">The term "crypto crash" has become popular on the internet. Furthermore, the total market value of cryptocurrencies is about $1.12 trillion. This is roughly one-third of what they were worth in November 2021, with over 35% of the loss occurring in the second week of May.</span>

<span style="font-weight: 400">"The collapse of TerraUSD has triggered what we used to refer to as 'the panics." Economist Frances Coppola declared. He explained that large financial institutions sold most of their assets during the panics while everyone quickly tried to get their money out.</span>

<span style="font-weight: 400">Terraform Labs, the company behind TerraUSD and Terra Luna, did something unprecedented and highly controversial on Friday, 6th May 2022, by halting trading on its blockchain. The company stated in a tweet that it had to do this to "develop a plan to put it back together."</span>

<span style="font-weight: 400">Do Kwon, the founder of Terraform Labs, had previously tweeted: "I know the last 72 hours have been extremely difficult for everyone. Please know that I am determined to work with each of you to overcome this crisis and that we will build our way out of it." A plan was devised to fortify Terra Luna by issuing more tokens, but many Twitter users who have lost a lot of money have approached the company for assistance.</span>

<span style="font-weight: 400">Meanwhile, the company's Discord server, which allows investors to discuss issues, announced that they locked it so that new people can't join and spread fear, uncertainty, doubt, and false information."</span>
<h2><strong>Why are Stablecoins Used In Crypto Trading?</strong></h2>
<span style="font-weight: 400">Stablecoins address one of the most significant issues with most popular cryptocurrencies: their extreme volatility makes them difficult to use for real-world transactions. According to Anthony Citrano, the founder of Acquicent, a market for non-fiat currencies, "digital currencies like Bitcoin and Ethereum are exceedingly volatile, making it difficult to figure out how much something is worth in their terms." </span>

<span style="font-weight: 400">Stablecoins circumvent this issue by tying their prices to a reserve currency everyone understands and respects. Some stablecoins, due to their stability, you can utilize as currency in a crypto brokerage. For example, traders can convert Bitcoin into stablecoins such as Tether, which can be used in place of US dollars. </span>

<span style="font-weight: 400">Stablecoins are more accessible than income earned through the banking system. Smart contracts, a sort of electronic contract whose conditions are carried out automatically when met, can also be employed with stablecoins. In addition, the stability of digital money makes it easy to prevent disagreements that can occur when dealing with volatile cryptocurrencies.</span>
<h2><strong>What Are The Risks Of Stablecoins?</strong></h2>
<span style="font-weight: 400">Stablecoins may appear to offer minimal risk at first glance. They differ from other popular cryptocurrencies because they are backed by something. However, stablecoins have some risks that other cryptocurrencies do not:</span>
<h3><strong>Security</strong></h3>
<span style="font-weight: 400">Stablecoins, like other cryptocurrencies, must be stored somewhere. For example, you can store it in a digital wallet, a broker, or an exchange. However, this can be risky because a specific trading platform may not be secure enough or may have some vulnerabilities.</span>
<h3><strong>Counterparty risk</strong></h3>
<span style="font-weight: 400">Cryptocurrencies are relatively decentralized in reality. However, a transaction involves more than one party, such as the bank holding the reserves and the company producing the stablecoin. Furthermore, you must carry out the correct actions for the currency's value to remain constant (security, proper reserving, etc.).</span>
<h3><strong>Reserve risk</strong></h3>
<span style="font-weight: 400">The reserves that support a stablecoin are an important aspect of the stablecoin ecosystem. These reserves are the last line of defense protecting the value of a stablecoin. Without them, the individual creating the stablecoin cannot be certain of its worth.</span>
<h3>Lack Of Confidence</h3>
<span style="font-weight: 400">If you adequately backup a stablecoin by actual assets, it may suffer a run and lose its peg to its target currency. This happened in May 2022 to the algorithmic stablecoin TerraUSD. They backed it up with other cryptocurrencies rather than cash. As traders lost faith in the stablecoin's capacity to maintain the peg, the stablecoin's price spiralled down.</span>

Ripples in the Crypto Economy: Could Stablecoins Be to Blame?

Stablecoins address one of the most significant problems with most popular cryptocurrencies: their volatility makes real-world use difficult

Oluwademilade Afolabi is a freelance writer and editor passionate about blockchain technology and the health industry. He is a 6th year medical student, and has worked with various companies and blogs since the blockchain revolution began.

Ripples in the Crypto Economy: Could Stablecoins Be to Blame?

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