Matt Levine, Columnist

Another Algorithmic Stablecoin Isn’t

Also meme stocks, SPACs and anti-ESG.

May 10, 2022 at 1:44 PM EDT

Matt Levine is a Bloomberg Opinion columnist. A former investment banker at Goldman Sachs, he was a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz; a clerk for the U.S. Court of Appeals for the 3rd Circuit; and an editor of Dealbreaker.

Before it’s here, it’s on the Bloomberg Terminal

LEARN MORE

I guess it is time to talk about algorithmic stablecoins again. Terra, or UST,1 is an algorithmic stablecoin whose price is maintained by an arbitrage relationship with another cryptocurrency, Luna. One UST is supposed to be worth one US dollar, and one UST can always be exchanged for a floating quantity of Luna with a market value of $1. If a UST is trading at $0.99, you can buy it for $0.99 and then exchange it for $1 worth of Luna, making an instant profit. If it is trading at $1.01, you can buy $1 worth of Luna (for $1) and use it to buy a UST worth $1.01, making an instant profit. Because of this arbitrage relationship, while the price of Luna can fluctuate, the price of Terra should always be $1: If it trades above or below $1, people will exchange Terra for Luna or Luna for Terra until the price of Terra gets back to $1.

When we talked about Terra last month, I wrote:

Before it’s here, it’s on the Bloomberg Terminal

LEARN MORE