When Terra's stablecoin lost its peg to $1, it resurrected a debate on how stablecoins should operate. Unlike other stablecoins, Terra USD was not backed by collateral. Instead it used a set of algorithms and smart contracts to try and maintain the coveted $1 value. Traditional stablecoins like Tether and USD Coin use a more straightforward model by having an equal amount of assets worth the same amount of stablecoins issued. While there is some concern over the actual amount of reserves due to a lack of transparency, these types of stablecoins are generally considered to be less risky.
The meltdown of Terra was not only a failed experiment, but a costly one which might finally push governments around the world to issue guidance and legislation on stablecoins since it cost investors roughly $40 billion.
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Source Fool.com