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Unstable Phase of Stable Coins

For many people who are unaware of the concept Stable coin, here is a simple definition. At every and any point of time in the perfect world, it would be a $ 1 to 1 Stable coin unit. But the people who are above 20 years know very well the financial world is perfectly imperfect.

The concept is very difficult on a sustainable basis as it implies that the exchange rate of the stable coin economy will always be pegged to one US Dollar. And this has not been witnessed ever in the real world economy even though exchange rates have been in existence for centuries. Then how can a single private venture be able to do it on a sustainable basis?

The logic behind it is that all the money routed through stable coins will be put in the stable investment class and for many such coins it was every asset except US Treasury and Cash. Ignoring the stable assets money is routed back to cryptocurrencies or the blockchain itself making the system exposed to an unimagined level of instability.

And over the past couple of weeks, this instability has been on a roar causing chaos in the asset class. Terra based on the Luna blockchain is supposed to trade at par to the dollar but currently trades at 0.5 units to a dollar. Tether the biggest of them is trading at 0.989 but had slipped to a low 0.96 and it has already seen an outflow of $300mn in the last twenty-four hours.

There are billions of dollars invested and circulating in this category that has already been raised as a financial stability risk by the USA Treasury. The longer the instability exists the further pressure on the asset class resulting in the first full-fledged crisis that might result in many never returning.


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