TerraUSD meltdown, part 1: What is a peg?

Welcome to the cryptohunt jam where we spend one minute a day to explain crypto. In plain english.

What is a peg and what does it do for stablecoins? Welcome to part one of our one-week special on the TerraUSD collapse.

You probably heard about the crypto meltdown of the not-so-stable stablecoin TerraUSD. And it all started with it losing its “peg”. But what is a peg anyhow, and what does losing it do?

A peg describes a very close relationship in value between two financial instruments. The price of one always follows the other’s very closely, something finance called “peg”.

In this case, TerraUSD was pegged to the US Dollar, which is just a fancy way of saying that its own value is always very close to one actual US Dollar.

Unlike other crypto currencies which fluctuate a lot in value, one TerraUSD should have always been worth one US Dollar.

But the system isn’t perfect, think of the peg like a rubber band between the two. In normal times, a TerraUSD could be worth 99c, or a dollar and a cent. The rubber band keeps them close enough for those differences to be very, very small and not matter in practice.

Until it lost the peg. That rubber band snapped, and the stablecoin lost its value and plummeted. It currently sits at just 17c, a total loss of 9 billion dollars which makes this one of the largest crypto meltdowns ever.

So: How on earth did that happen? Let’s dig into the inner workings of TerraUSD’s rubber band in the next episode.

Disclaimer: This podcast references our opinion and is for information purposes only. It is not intended to be investment advice. Do your own research and seek a duly licensed professional for investment advice.