What happened
Cryptocurrency prices are falling hard across the board today, with Maker (MKR +2.91%) being a notable exception. At 11:15 a.m. ET, the price of Maker tokens was up a whopping 19% over the previous 24 hours. And it's likely because TerraUSD (UST +1.47%) and Terra's Luna tokens (LUNA +0.79%) are trending toward zero at the moment.
So what
For context, a stablecoin is a cryptocurrency for which the price is supposed to always be equal to a government-issued currency -- most often the U.S. dollar. MakerDAO is the organization behind a stablecoin called Dai (DAI 0.01%). Terraform Labs is behind a stablecoin called TerraUSD.
Image source: Getty Images.
There are other U.S. dollar stablecoins as well, including Tether and USD Coin. And to be clear, different stablecoins use different mechanisms to keep their values, well, stable. And right now, these various stablecoin models are trying to demonstrate their merits in order to gain widespread adoption.
Tether and USD Coin both hold real U.S. dollars in reserve, making them close competitors. By contrast, Dai issues new tokens based on crypto assets locked up in the system. Similarly, TerraUSD isn't backed by dollars but rather by a burning-and-minting symbiotic relationship with Luna.
Without going too far into the weeds, the rivalry between TerraUSD and Dai isn't imaginary. On March 23, Terra founder Do Kwon said on social media, "By my hand Dai will die."
The sad irony is that over the past couple of days, TerraUSD and Luna entered a death spiral, with the value of each declining faster than its algorithmic mechanisms can repair the damage. As of this writing, TerraUSD has bounced off its lows, but it's still down more than 50% from $1, and it's fair to wonder if it will ever recover.
Now what
While TerraUSD's demise would be good for Dai because there'd be one fewer player, I'd be cautious approaching the stablecoin space right now. I believe the true takeaway with TerraUSD's decline is that these models are still new and still being tested. Because of this, weaknesses are sometimes unexpectedly uncovered, and the fallout can be swift.
Therefore, if you do chose to buy Maker tokens because of what's happening with Terra, be sure that -- like always -- it's a disciplined investment and not more than you could afford to lose if something goes wrong.
