What advantage does UST (Terra Luna dollar) have over other stable coins like USDC and USDT (Tether)?
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While USDT is used more frequently for trading and payments, USDC is often described as a safer stablecoin since Centre makes a greater effort to comply with audits and governmental regulation, and has more transparent, fully-backed reserves.
TerraUSD (UST) appeared as a stablecoin that intends to benefit users and the community at large. The guide provides detailed description of the coin and explains the advantages of UST over alternative stablecoins.
TerraUSD (or UST) is a decentralized, scalable, interest-bearing, and algorithmic stablecoin offering a wide range of features. In particular, it is famous for its predominantly infinitely scalable monetary policy. The stablecoin has grown into its role as the ultimately scalable stablecoin since its launch in 2020. With a surging demand in stablecoins, it was clear that most of them are not genuinely scalable. Therefore, there was a need for a stablecoin like TerraUSD. It is set to challenge stablecoin market leader DAI. It offers a scalable experience to the DeFi market amid the severe scalability issues many conventional chains face.
Do Kwon and Daniel Shin started Terra, the company behind TerraUSD, back in April 2019. On September 12, 2020, they released TerraUSD on Bittrex Global. Since TerraUSD’s debut on the market, it has been wildly successful, beating competitors like Gemini’s GUSD and Paxos’ PAX, both backed by fiat money held in actual banks and subject to issuer control.
Terra, TerraUSD’s native blockchain, is a brainchild of Terraform Labs. The latter is a subsidiary of the Terra Alliance that consists of 16 e-commerce companies spread out around East Asia. Its founders Do Kwon and Daniel Shin are both exceptional professionals. Daniel Shin is a brilliant economist and entrepreneur. He has established other companies like TMON and Fast Track Asia in the past, while Do Kwon is a former Microsoft Corp (NYSE: MSFT) and Apple Inc (NYSE: AAPL) software engineer. He is listed on Forbes Under 30 list of most successful entrepreneurs in the world.
Launching with a combination of features that no other stablecoin has managed to put together yet has no doubt helped UST. Despite it is relatively new, its success has been unprecedented in the industry. Experts predict the UST will soon overcome the top stablecoin in its category, MakerDAO’s DAI.
How Does TerraUSD Function?
Terra uses a few simple protocols and policies to achieve TerraUSD’s essential features. They include scalability, yield-bearing, and interchain capabilities. TerraUSD takes advantage of pre-existing technology and innovations to provide users with the best experience.
TerraUSD (UST) is an algorithmic stablecoin, which means the cost of minting is equal to the face value of the minted stablecoins. It uses LUNA, Terra’s native cryptocurrency, as a reserve asset. In other words, if you want to mint one TerraUSD, only $1 worth of Terra’s LUNA token is burned out of the system.
Besides, the stablecoin can earn stable yield using the “Anchor” yield service, an unheard-of development among stablecoins. TerraUSD also allows the linking and enabling of blockchain ecosystems, using a bridging protocol known as Dropship. Dropship allows integration of TerraUSD into DeFi platforms and DEXs as well as its moving between blockchains.
This protocol helps preserve scalability. Furthermore, it guarantees the stable value of UST since LUNA’s demand and supply determine the value of TerraUSD. It runs on a Proof-of-Stake (PoS) system where miners must stake the native Terra’s LUNA token to mine Terra transactions.
Mining the token requires validators on the Terra Network to stake LUNA. These validators will serve as oracles for the dollar price of LUNA. In return, they earn small quantities of token from UST transactions.
Another vital technology supporting interest yielding with UST is the Anchor protocol, a lending and saving protocol that promises a 20% return on savings made in UST. In contrast, MakerDAO’s DAI has a 12% return, and Coinbase’s USDC has a 14% return. Anchor also allows users to borrow up to half of their staked LUNA. Collateral for loans will be in the bonded LUNA token (bLuna), a staked version of LUNA that earns returns. However, soon, Terra plans to allow native cryptocurrency from other Layer0 chains to act as collateral.
TerraUSD vs. Terra’s LUNA
LUNA is the mainstay coin of the entire Terra ecosystem. The token allows the users of the ecosystem access to governance, helps stabilize the ecosystem as the whole, and forms the community pool that holds funds for building DApps. Since its inception, the coin has risen tremendously.
LUNA’s use in the Terra ecosystem is crucial to many services, not precluding the TerraUSD (UST) stablecoin. The stability of the TerraUSD depends on the burning of LUNA, and the values of both coins intertwine. Whenever UST supply increases, LUNA’s price goes up.
When the price of one UST exceeds that of a dollar, you can sell LUNA for the UST coin or dollars, and new UST coins come into the market to inflate value and drive it back to a dollar. However, when UST’s value falls below a dollar, the token is sold for LUNA or dollars for profit.
This interaction, known as seigniorage, always leads to an amount of LUNA being burned, making it scarcer, driving the value up, kindling transactions, and simplifying adoption. At the same time, the rest goes into the community pool.
Use Cases of TerraUSD
TerraUSD (UST) appeared as a stablecoin that intends to benefit users and the community at large. It partakes in a wide variety of services and is a part of several products. Sometimes it is used alongside LUNA, and sometimes, its functions one-of-its-kind.
TerraUSD promises high scalability, interest-bearing, and interchain usage. Several DeFi protocols can use the coin without losing scalability, as UST can fulfill high demands due to its unique minting mechanism. E-wallets like Chai and MemePay can also use TerraUSD by integrating it as a payment option.
A dynamic area where UST has excited Terra’s users is yield or interest-bearing. Anchor’s interest or profit on the Terra platform depends on block rewards in UST from PoS chains existing in the PoS space. This interchain operability is supported by a novel bridging protocol Dropship, allowing UST to easily move between blockchains.
Another use for UST is in DApps. For example, Mirror protocol, a platform that allows the minting of fungible “synthetic assets” that track the prices of real-life assets in the present time, uses UST as a bare asset.
With a circulating and max supply of about 1.9 billion UST and a market cap of $150 million, Terra has done very well with their token, building what seems to be a masterpiece. The scalability and interchain operability of the UST make it one of the largest stablecoins on the market.
The surge in demand for a scalable and utilizable stablecoin has driven many companies to try building their stablecoin. However, TerraUSD seems to be the best so far, its various features and use-cases make it the premier building block of a successful DApp.
Commenting on the future of their ecosystem, Terra confessed excitement at the developments in the DeFi space. In particular, it is enthusiastic about Cosmos and Polkadot for strides in connecting blockchains, Algorand and Avalanche for their efforts in boosting scalability across the crypto space, and Solana for their focus on crypto exchange and asset listing. Terra intends to stay close to these blockchains and hopefully build a better crypto space together.