A crypto project that presented itself as a solution to transform stablecoins suffered a token crash of more than 90%, replicating patterns seen in previous failures such as the collapse of Terra in May 2022; the episode calls into question the robustness of algorithmic models and high-yield strategies that attract liquidity.
The project promised to maintain the stablecoin’s parity through a mint-and-burn mechanism between the stablecoin and its complementary token. That design, known as an algorithmic stablecoin, attempts to sustain a peg without traditional backing and depends on a continuous flow of demand and trust.
When the peg began to fail, the mechanism increased the supply of the complementary token in an attempt to absorb the deviation, which triggered a selling spiral and hyperinflation of the token. The result was a drop of more than 90% in its price, a pattern that recalls the dynamics that caused the implosion of UST/LUNA in May 2022, when the ecosystem lost more than $40 billion in market capitalization in days.
The promise of high returns —in Terra’s case, yields close to 20% via a lending protocol— acts as a risk amplifier when liquidity dries up.
The episode exposed typical vulnerabilities: dependence on perpetual growth, lack of tangible collateral, and rapid liquidity outflows without effective hedging routes. In addition, operational errors and governance failures in other projects (unauthorized minting, use of trademarks without permission) have precipitated similar 90% token crashes.
Market impact and lessons for operators
The shock not only destroys nominal value: it erodes trust and forces a recalibration of risk appetites in derivatives and capital flows. In contemporary examples cited, tokens such as XPL recorded declines close to 90% when on-chain activity did not justify the valuation (according to industry coverage), and other projects partially recovered after technical corrections, showing pronounced volatility in altcoins.
A case linked to institutional investors was the paper loss of more than $50 million reported in a vehicle that had supported another token, illustrating the risk to significant capital. The regulatory reaction has intensified: bodies such as the SEC (mentioned for its internal initiative), the EU with MiCA and the Financial Stability Board have increased scrutiny of stablecoin models and the supervision of systemic risks.
For traders and managers, the operational implication is clear: leverage and exposure to products that promise high yields can amplify losses in illiquidity scenarios, so hedges in derivatives and the assessment of basis and funding become critical.
The crash underlines that innovation in stablecoins requires tangible backing, resilient design and verifiable liquidity plans; without them, the supposed transformation can turn into accelerated capital destruction.
