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1 1 (May 16, 2022)

handle is hein.crs/goveftl0001 and id is 1 raw text is: SCongressional ** Research Service informing the lgislative debate since 1914____________________ Algorithmic Stablecoins and the TerraUSD Crash May 16, 2022 What Are Algorithmic Stablecoins? Stablecoins are a type of cryptocurrency that aim to maintain a stable value. There are several classes of stablecoins that each use different methods to try to achieve this, one of which is algorithmic stablecoins. While no precise definition captures all of their features, algorithmic stablecoins typically use an algorithm or smart contract to manage the supply of tokens and guide their value to some reference asset (for example a fiat currency, such as the U.S. dollar). Algorithmic stablecoins generally do not attempt to achieve value by holding a reserve of fiat-denominated assets with a value in a 1:1 relationship with the value of the stablecoin. Instead, algorithmic stablecoins use different mechanisms to control the supply or value of the stablecoin, including the minting or burning of coins, rebasing, and arbitrage. What Happened with TerraUSD? TerraUSD (UST) stablecoin uses an arbitrage mechanism typical of some algorithmic stablecoin arrangements consisting of two coins or tokens: the stablecoin, in this case UST, meant to maintain a stable value or peg, and a balancer token, in this case, LUNA, the value of which can fluctuate. An algorithm manages the relationship between these two coins to attempt keeping the stablecoin pegged to the reference. If strong demand pushed the price of UST above its peg, arbitrageurs could buy $1 worth of LUNA, trade it for 1 UST (worth more than $1) and sell UST for a gain. If UST falls below $1, someone can buy $0.99 worth of UST and trade it for $1 worth of LUNA. In both instances arbitrageurs net a profit and ostensibly maintain the peg. Over the past week, UST lost its peg to the dollar (Figure 1), and both UST and balancer coin LUNA were dropped from various cryptocurrency exchanges. UST hit a low of $0.12 at 9 a.m. on May 16, 2022. Congressional Research Service https://crsreports. congress.gov IN11928 CRS INSIGHT Prepared for Members and Committees of Congress

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