South Korean entrepreneur Do Kwon hawked terraUSD as an innovation that would transform the industry. Stablecoins are supposed to be exactly what their name implies: stable. They’re pegged to the value of an existing currency, usually the dollar, so that buyers can always exchange them at a 1-to-1 rate. Traditionally, their value is backed by a reserve including more reliable assets such as cash and treasuries — themselves backed by the full faith and credit of the United States.
Not so for terraUSD. TerraUSD is backed instead by … wait for it … an algorithm.
Kooky as this concept sounds, in the end it’s rooted less in complicated computer science than in good, old finance. TerraUSD was tied to a newly minted cryptocurrency (but not stablecoin) also controlled by the Terraform Labs company, called luna. To put things much too simply, the tokens’ creators linked terraUSD to luna in such a way that, when high-frequency traders eager to earn an easy buck sold…
