TerraUSD, the so-called stablecoin which unexpectedly broke its dollar peg this week, will adjust its complex pegging mechanism in an attempt to stabilise the cryptocurrency, its co-founder said in a tweet on Wednesday.
Stablecoins are digital tokens pegged to the value of traditional assets, such as the U.S. dollar. They are popular in times of turmoil in crypto markets and are a common medium of exchange, often used by traders to move funds around and speculate on other cryptocurrencies.
TerraUSD, also known as 'UST' is one of the largest by market capitalisation, but unlike most other major stablecoins which are backed by other assets, TerraUSD's value is derived by complex algorithmic processes, linked to another paired token called Luna, which is free floating.
TerraUSD broke its 1:1 peg to the dollar this week roiling cryptocurrency markets already under pressure alongside tumbling stock markets, and dropped further to as low as 30 cents on Wednesday according to price website Coingecko.
Do Kwon, co-founder of Terraform Labs the company behind the token, announced a "recovery plan" in a series of tweets, saying the company would seek additional outside funding and "rebuild" TerraUSD so that it is collateralised, meaning one that is backed by reserves rather than relying on an algorithm to maintain its 1:1 dollar peg.
"A bailout was to be expected, and UST essentially becoming collateralised is the only outcome that makes sense," said Joseph Edwards, head of financial strategy at crypto firm Solrise.
"The proposals are sensible, but won't do anything without massive amounts of external capital." Regulators have highlighted stablecoins as a potential threat to financial stability, but are divided as to the size of the threat given that the overall crypto market is relatively small.
(Reporting by Alun John; Editing by Kim Coghill and Louise Heavens)
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