Like Terra’s UST, another stablecoin lost peg and you’ll freak out when you see which one

Tether plummeted to $0.96 during Asian trading hours on Coinbase, losing its $1 peg. The largest stablecoin by market cap appears to be following the path of algorithmic stablecoin TerraUSD (UST), which collapsed to $0.29 on May 11, 2022. 

Also read: Is MicroStrategy facing possible bankruptcy on Bitcoin collapse?

Tether loses its peg, struggles to recover 

The recent collapse of TerraUSD (UST) has triggered a negative sentiment among stablecoin holders. 

Crypto investors are bearish on stablecoins in the recent bloodbath. Billions have been wiped off the market capitalization, and stablecoins like USD Tether (USDT), USD Coin (USDC), Binance USD (BUSD), DAI have lost their $1 peg. 

As USDT loses its peg, $300 million has been exchanged for USD. So far, Tether.io has honored all redemption requests. 

Paolo Ardoino, CTO of Bitfinex and Tether, reminded his 129,500 followers that Tether.io had honored redemption requests despite high volatility in the market. 

A Tether spokesperson told Blockworks in an email, 

Tether has withstood multiple ‘black swan’ events in cryptocurrency. The collapse of the UST peg is one of those events. We’re proud to say that the 1:1 peg to the dollar on USDT has been successfully maintained, and Tether has never once failed to honor a redemption request from a verified user.

Experts weighed in on where Tether is headed after losing its peg and how other stablecoins could suffer the impact of USDT’s price drop. Brad Yasar, CEO of DeFi platform EQIFI, does not believe that the stablecoin market as a whole will suffer. Yasar was quoted as saying,

The asset-backed stablecoins — as long as their reserves match the number of coins in circulation — are not prone to de-pegging by market movements. Algorithmic stablecoins that are not asset-backed so far have been de-pegged by violent market movements.

Regulators Janet Yellen, US Treasury Secretary and Jerome Powell, Chair of the Federal Reserve, noted that the growing size of stablecoins has created a situation where vast amounts of US-dollar equivalent coins are being exchanged without touching the banking system. Regulators have warned investors of a situation similar to a bank rank. 

Tether is considered a pathway for new entrants and investors in the crypto ecosystem, where USD deposits and other cryptocurrencies can be redeemed for USDT. Tether finds massive utility across cryptocurrency exchanges, DeFi, lending pools, wallets, payment processors and financial services. 

The combined Total Value Locked (TVL) of the DeFi ecosystem is currently $61.56 billion. Decentralized exchange pools and protocols holding these funds could fall apart in response to Tethers depeg. As investors rush to exit liquidity provider positions and traders identify arbitrage opportunities, all protocols dependent on liquidity pools could suffer a dent and rapidly lose TVL. 

Michaël van de Poppe, a leading analyst and crypto YouTuber, believes a collapse in USDT is unlikely. The loss of the stablecoin’s $1 peg was sparked by the rush and panic from the colossal crash of UST. The analyst argues that the stablecoin’s price drop is temporary, and USDT is likely to reclaim its peg soon.