After UST and Luna, another Stablecoin has fallen

Fears of a recession have put a damper on the value of cryptocurrencies. There is a collapse in tokens, which are meant to lessen volatility,

Traders in the cryptocurrency market are at a loss for direction.

As the phrase goes, 

"When the stock market coughs, digital-currency prices develop pneumonia."

Due to concerns about a possible economic downturn, this has remained this year as well. Inflation is at its highest level in 40 years, and supply chains have been disrupted by the resurgence of covid-19 in China, which has exacerbated the problem.

Every asset class has been targeted for liquidation by investors. Stablecoins, for example, have their own set of challenges, on top of the general downbeat outlook for the crypto industry.

For this reason, stablecoins need at least as much money as the number of coins in circulation to be backed by real assets.

According to Coinbase's blog, 

"The value of cryptocurrencies like bitcoin and ether fluctuates a lot — sometimes by the minute, An asset that’s pegged to a more stable currency can give buyers and sellers certainty that the value of their tokens won’t rise or crash unpredictably shortly."

Investors who are still wary of investing in cryptocurrency might use stablecoins as a safety net. However, the recent collapse of the stablecoin UST or TerraUSD and its token Luna has violated this premise. Both are part of the Terra network.

The currency peg was broken in the wake of the massive influx of UST token holders eager to cash out. 

The UST reserve mechanism was found to be ineffective by the market. 

UST is, in fact, an algorithmic stablecoin; in other words, it is backed not by dollar reserves but rather by its sister asset Luna, which has to be permanently destroyed by a computer code.

In contrast to tether (USDT) and USD Coin (USDC), algorithmic stablecoins are not backed by real dollars or similar assets held in a bank.

'The Biggest Disaster in Cryptocurrency'

Millions of retail and corporate investors suffered massive losses when the value of UST and Luna fell simultaneously.

 The Street's Rob Lenihan has a story on investors who claim that UST and Luna have put them in financial peril.

As measured by market capitalization impacted compared to overall crypto market cap, 

"Terra’s demise is one of the largest fiascos in crypto-market history as measured by market capitalization affected relative to total crypto market cap," 

In November, the cryptocurrency market had a market capitalization of $3 trillion.