What happened
The price of cryptocurrency Waves (WAVES 2.62%) has had an exciting week. As of 12:45 p.m. ET today, the price per token is only up 1.5% over the previous 24 hours. But the price has roughly doubled over the past week. And it's likely due to increasing optimism for the Waves ecosystem, which includes stablecoin Neutrino USD (USDN).
So what
As a stablecoin, the price of Neutrino USD should always be $1. But it is more similar to failed stablecoin TerraUSD than to a stablecoin like Tether, which is backed by U.S. dollar reserves. And from May 9 to May 12, the price for Neutrino USD dropped all the way to $0.75, according to CoinMarketCap.com.
TerraUSD was collateralized by Luna (now called Luna Classic). The supply could increase or decrease by minting and burning new tokens in accordance to demand with an exchange mechanism between TerraUSD and Luna Classic. At least that's how it was supposed to work. In reality, the two tokens ultimately entered what's called a "death spiral" and couldn't pull out.
Image source: Getty Images.
Therefore, when Neutrino USD fell, many assumed that it would enter a death spiral with its accompanying token Waves as well. But it didn't. As of this writing, the price of Neutrino USD is $0.99 -- not perfect but practically recovered.
Because Neutrino USD was able to fight its way back, it's restoring investor confidence in Waves, and that's why the price has recovered so dramatically in the past week.
Now what
There's a flip side to this conversation. To restore Neutrino USD to its $1 peg, coins had to be removed from circulation. Because of this, the overall market capitalization has fallen roughly 20% since April. This has effectively decreased total coin supply to meet user demand and stabilize the price.
But lower demand is a concern. For the price of Waves to keep going up sustainably, you'd want to see an increase in activity on the entire ecosystem, including for Neutrino USD. But as suggested by Neutrino USD's declining market cap, that might not be happening right now, which is something to keep an eye on.
