Stablecoins in 2022: Too Many Challenges to Handle?

2022 was not a good year for stablecoins as some of them lost their parity and value. It’s still reminiscent how in May, Terra’s LUNA lost 99.9% of its value. During the period, the UST (50/50 LUNA/BTC) stablecoin memorably lost its peg. As UST got sold it forced the selling of BTC to maintain the UST peg and the cycle expanded. Over the then next 36-hours, LUNA price fell below $0.1, and the UST peg traded between extremes of $0.30 and $0.82. This put the protocol redemption mechanism into overdrive, as users both panicked, and arbitraged the exchange of 1 UST for $1 worth of LUNA, inflating the supply and depressing prices further.

Over the course of just few days, from May 10 to May 12, two top 10 digital assets by market cap (LUNA and UST) erased nearly $40 Billion in investor value. UST lost its $1 peg completely, and LUNA collapsed to a price of $0.00001 or what was referred to as becoming ‘hyper-inflated’. As a result, the Luna Foundation Guard (LFG) and the $30 billion Terra ecosystem deployed their established reserves of 80,394 BTC to defend the peg, remarkably without much of success – demonstrating the fact that panic is a game-changing phenomenon across all markets, not just traditional ones.

On Sunday, August 14, the Polkadot-based stablecoin Alpaca USD (AUSD) fell below the value of 1 US cent, but after a few hours it recovered to $0.95. According to pertinent reports, the Acala protocol was hacked, and the attacker managed to steal 1.2 billion Australian dollars.

“We noticed a configuration issue in the Honzon protocol that affected AUSD,” Acala Network said. “We have urgently decided to suspend operations on Akala, and for now we are investigating and fixing the problem. We will let you know when we return to normal network operation.”

Acala confirmed that a large amount of AUSD was minted as a result of the error. “We identified the issue as a misconfiguration of the iBTC/AUSD liquidity pool, which resulted in a large amount of AUSD being erroneously minted.”

The company stated that the misconfiguration has already been fixed and that the team was able to identify the wallets that received the erroneously minted AUSD tokens.

“Pending the decision of the Acala Community Collective Management to resolve the minting error, the erroneously minted AUSD remaining on the Acala Network, as well as the Acala Network’s own tradable tokens, have been deactivated by transfer.”

We see, however, that most bad stories involving stablecoins occur as a result of negligence and light-mindedness, leading to malicious speculations and/or hacks. So, the bottomline is that stablecoins’ reputation has to be defended and protected but new creative mechanisms, because there is nothing wrong about their existence in principle.