Why this obscure corner of the crypto world has investors in a panic
London (CNN Business) Within the often head-scratching world of cryptocurrencies , there's a small but growing sub-species known as "algorithmic stablecoins" that have some investors and regulators ringing alarm bells.
This week, one popular so-called algo coin cratered, wiping out billions of dollars' worth of value in just a few days.
To understand what's going on in this corner of the crypto market, it's important to understand what these newfangled investing products are and how they work.
Cryptocurrencies like bitcoin and ether are known for wild swings in value that make investors nervous.
Their purported stability has turned these once obscure tokens into the bedrock of the crypto ecosystem.
But it's stablecoin's wayward cousin, the "algorithmic stablecoin" that triggered a panic among investors this week.
But algorthmic stablecoins aren't necessarily backed by any real external asset, relying on complex financial engineering to hold their value steady.
Traders who engage in a process called arbitrage are able to make a quick profit by exploiting fluctuations in either asset — creating an incentive to hold Terra's value steady at $1.
This eventually creates an ecosystem in which traders exchange Lunas and Terras to keep the value of Terra at $1.
The wheels started to come off over the weekend, when investors began to pull out of both Terra and Luna.
Do Kwon, the CEO of Terraform Labs, tweeted Wednesday that recovery efforts were under way, encouraging investors to "stay strong."
Investors and regulators on edgeBitcoin, the world's largest cryptocurrency, has also suffered from the souring mood in crypto.