TerraUSD, the "algorithmic stablecoin" whose collapse prompted a multibillion-dollar selloff across crypto markets, has turned off its blockchain and been delisted from major exchanges, in effect shuttering the project for good.
However, the wider impact of the project's failure appears to have been constrained. TerraUSD was once valued at more than $40bn (£33bn).
Shockwaves swept through cryptocurrency markets on Thursday as tether, the largest stablecoin and a foundational part of the digital asset ecosystem, broke its peg to the dollar. On Friday, however, tether was back to within a fraction of a per cent of its $1 peg and has successfully processed more than $3bn worth of withdrawals without issue.
Bitcoin and ethereum, the two most important cryptocurrencies, have recovered from their lows of early Thursday. Bitcoin is trading at above $30,000 a coin, up from $27,000, while Ethereum is at $2,000, up from $1,700. Both remain far below where they were trading at the start of the week.
Terra's failure is likely to topple more dominoes, warned Fitch Ratings. "The failure of Terra's peg has sent shocks through the decentralised finance sector, with a key saving and lending protocol, Anchor, seeing massive liquidation of UST-collateralised loans and the pricing of other crypto tokens also being affected," the company said.
Stablecoins are intended to maintain a fixed value, typically $1 a coin. But some, such as Terra, are "algorithmic" stablecoins, which maintain that price through a promise to print or destroy currency to match demand. That approach has been criticised as sharing elements with a Ponzi scheme, requiring regular inflows of new capital to maintain the peg, and prone to a "death spiral" if investors lose confidence.
That death spiral has left Terra's two tokens effectively valueless. UST, the stablecoin, is now trading at under 20¢, far from its dollar peg; and Luna, the freely floating token that is supposed to provide the backing for the algorithmic stability, has fallen from $81 a coin seven days ago to $0.00004 a coin.
The death spiral was worsened on Friday morning, when the key players behind Terra agreed to disable the blockchain that makes the system work, leaving the remaining holders unable to receive rewards for participation. At the same time, cryptocurrency exchanges including Binance and FTX moved to limit trading of the token, in an effort to protect naive investors from further losses.
Despite the crash, the UK government says it aims to make stablecoins a legal part of the country's payments infrastructure.
"Our ambition is to make Britain a global hub for crypto-asset technology," a Treasury spokesperson said , "by creating a regulatory environment where firms can invest, innovate and scale up, while maintaining financial stability and regulatory standards to ensure people can use new technologies reliably and safely.
"We are delivering on this ambition - by consulting on a future regulatory regime for crypto-assets, legislating to bring stablecoins into payments regulation, and exploring ways of enhancing the competitiveness of the UK tax system to encourage further development of the crypto-asset market in the UK."
