Blockchain, DLT, and Fintech
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Paper Number
1975
Paper Type
short
Description
Comparing to other price-volatile cryptocurrencies, stablecoins provide a reliable way to store value and make transactions, and thus are more suitable for daily-life usage and investment risk control. However, there remains a lack of understanding of how stablecoin can gain success. This may lead to the introduction of stablecoins based on uninformed proposals, which may eventually fail. In turn, owners of these stablecoins may suffer from significant financial losses. Using theories of Information Systems and digital startups failures as the theoretical foundation, our study identified four underlying factors (lack of scarcity, lack of fiat reserve backup, decentralization, and failure of value creation) and two triggers (massive selling by major investors and algorithm malfunction) behind the collapse of a stablecoin, based on the case of TerraUSD’s collapse. Our findings provide implications for stablecoins issuers to prioritize maintenance and foster user adoption, thus increasing the likelihood of success of stablecoins.
Recommended Citation
Nurbaev, Vladimir; Au, Cheuk Hang; and Chou, Chih-Yuan, "When Stablecoin is No Longer Stable - A Case Study on the Failure of TerraUSD" (2023). ICIS 2023 Proceedings. 7.
https://aisel.aisnet.org/icis2023/blockchain/blockchain/7
When Stablecoin is No Longer Stable - A Case Study on the Failure of TerraUSD
Comparing to other price-volatile cryptocurrencies, stablecoins provide a reliable way to store value and make transactions, and thus are more suitable for daily-life usage and investment risk control. However, there remains a lack of understanding of how stablecoin can gain success. This may lead to the introduction of stablecoins based on uninformed proposals, which may eventually fail. In turn, owners of these stablecoins may suffer from significant financial losses. Using theories of Information Systems and digital startups failures as the theoretical foundation, our study identified four underlying factors (lack of scarcity, lack of fiat reserve backup, decentralization, and failure of value creation) and two triggers (massive selling by major investors and algorithm malfunction) behind the collapse of a stablecoin, based on the case of TerraUSD’s collapse. Our findings provide implications for stablecoins issuers to prioritize maintenance and foster user adoption, thus increasing the likelihood of success of stablecoins.
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07-Blockchain