What Was TerraUSD (UST)? How Did it Work?

Please note TerraUSD (UST)  depegged from the dollar and is no longer being traded on most exchanges. This caused the crash in value of Terra (LUNA). This article was written before this happened and is now being kept for reference purposes only.   

TerraUSD (UST) is a stablecoin created by Terraform Labs. The UST stablecoin is among the most innovative on the market – it’s a smart-contract algorithmic stablecoin.

TerraUSD price is maintained by burning (removing from the supply) LUNA tokens (the native token of the terra network).

The Terra network plans to purchase $10 billion of Bitcoin use as a UST reserve.

How TerraUSD (UST) Works

Let’s take a look at how UST price is maintained in simple terms.

Arbitrage plays a primary role in achieving UST price stability. This is not the typical arbitrage concept that you may know – it works differently for LUNA and UST.

The principle of the Terra ecosystem is that individuals are always able to swap LUNA for UST – with the price of UST always being $1. The market prices of either of these tokens are irrelevant.

This is especially important to keep in mind because if demand for UST surges, the UST price rises above $1. That means LUNA holders are guaranteed a profit, with no risk, by simply swapping $1 of LUNA to mint (create a new token) one UST token, which would be worth more than $1 due to the surge in demand.

The next part is also crucial to understanding the process. When the swap occurs, a certain percentage of LUNA is burned (removed from circulation permanently), and the community treasury receives the remainder of the token.

The Terra ecosystem is financed by funds in the community treasury – funds are used to finance new Dapps and projects that add value to the ecosystem.

The process is entirely algorithmic and has received much attention since its inception. Essentially, a decrease in the supply of LUNA makes the LUNA token more scarce, which has a positive effect on the price of LUNA.

When more UST is created (minted), the reverse occurs: UST tokens are now less scarce (more tokens in circulation), which negatively affects the price, helping bring the TerraUSD price back to $1.

The reverse process is also necessary to achieve the $1 peg. If the price of UST dips below $1, UST holders can still exchange TerraUSD (UST) for LUNA at a 1:1 ratio – a risk-free trade because LUNA is worth more because of scarcity.

Most recently, the Terra network has also made substantial Bitcoin purchases which will be used as a reserve for UST – this is the first stablecoin to have a portion of its assets backed by another volatile decentralized cryptocurrency.

The first Terra stablecoin has risen to become the 4th largest stablecoin by market capitalization – more Terra stablecoins might be on the cards in the future. Users can refer to the updated Terra whitepaper for a description of the protocol.

What Is TerraUSD (UST) Used For?

Terra was created to be a seamless and cost-effective global digital cash platform. It saw much success in South Korea, where it quickly became popular because it offered cheaper transaction fees than local credit card companies.

The average fee is below 1% of the amount transferred and is a computational fee. These fees are distributed to validators as rewards. What makes this system so efficient is that users can conveniently pay with Terra stablecoins – merchants can also seamlessly accept it as a payment method, which lowers their costs.

The use of Terra continues to evolve – more recently, people are using Terra for lending, borrowing, donations, and more.

Where To Buy UST?

Now that you’ve got a better understanding of what TerraUSD is and how it works, let’s look at where UST can be bought. Individuals are required to use fiat currencies to buy UST tokens on a crypto exchange.

The following crypto exchanges are safe places where you can buy, sell, transfer and store UST and other cryptocurrencies.

Five of the most popular crypto exchanges are:

1. Coinbase
2. Crypto.com
3. Kraken
4. Gemini
5. Binance

After using a fiat currency to purchase UST, the UST tokens will reflect in your personal UST digital wallet (which is stored and can be accessed on the crypto exchange). Individuals can use their debit or credit card to purchase UST on a crypto exchange of their choice.

The UST price is pegged to the U.S dollar, but exchanges still charge fees and have varying exchange rates.

How long has TerraUSD (UST) existed?

TerraUSD was launched on Bittrex global in September 2020. It was created by Terraform Labs – founded by Daniel Shin and Do Kwon.

The Terra community has continued to support the coin by helping it grow in popularity and actively trading with UST.

TerraUSD has quickly risen to become the 4th largest stablecoin on the market with an impressive $16,57 billion market cap.

It has been used by multiple merchants in e-commerce and DeFi protocols in the Terra Luna ecosystem.

**Purchasing stablecoins or any cryptocurrency should be at your discretion and never because of investment advice from internet sources.

What’s controversial about TerraUSD (UST)?

Historically there’s been a lot of controversy surrounding algorithmic stablecoins – the same can be said for UST. Let’s take a look at 2 of the top controversies surrounding TerraUSD (UST).

1. TerraUSD has De-Pegged Before – The entire principle of any stablecoin is to remain pegged to $1; that’s why people trust stablecoins. But, TerraUSD (UST) had lost its peg before – which left the community extremely concerned.

   On December 31st, 2020, UST’s price plummeted to $0.86 for a brief period. This sparked controversy regarding how effective the hybrid consensus mechanism was at maintaining the $1 peg.

2. Wonderland Crypto Scandal – Decentralized finance is still relatively new and risky to some degree. UST got mixed up in a major scandal that severely affected the price of LUNA and impacted Terra.

   Simply put, the role of Terra was that users could stake UST to lend out MIM (Magic Internet Money) on the Wonderland platform, which developers claimed was soft-pegged to the U.S dollar. At first, everything seemed to be functioning optimally, but once news broke about the scandal, it rocked Terra and caused a 17% drop in the price of LUNA.

How many UST coins are there?

There is currently 16.60 billion UST in circulation.

The number of UST coins has risen in recent years and will continue to fluctuate according to the hybrid mechanism in place.

Can you mine UST?

It’s not possible to mine UST. However, users can stake UST to receive a very generous APY.

Users need to connect their Terra station wallet to the anchor application and sequentially choose to stake UST.

What is the market cap of UST?

The market cap of UST is currently $16.60 billion.

TerraUSD (UST) Market cap = total amount of coins in circulation x $1

TerraUSD (UST) Market Cap = 16,600,000,000 x $1 = $16.60 billion

The market cap of UST will continue to fluctuate according to how many UST tokens are minted or burned.

Biggest Competitors Of TerraUSD (UST)

TerraUSD is a relatively new stablecoin that has performed incredibly well in the stablecoin market. Having only been released in September 2020, it quickly rose to surpass DAI (the first decentralized stablecoin) and become the 4th largest stablecoin.

However, it is still faced with a momentous challenge to reach 1st place. It needs to surpass the market cap of Binance USD (BUSD), USDC, and USDT to reach the top spot.

The USDT market cap is currently more than 4x larger than UST’s market cap. Additionally, it’s important to consider the trading volumes and trading popularity of various pairs – 57% of Bitcoin is traded to USDT stablecoin.

The more users trust and trade with UST, the faster it will become an even more prominent stablecoin.

What are the future plans for Terra and UST?

The future for Terra includes growing the number of users and e-commerce merchants using and accepting Terra as a payment method.

The faster the adoption occurs, the more exponential the growth will be for the Terra ecosystem and UST. There are plans to penetrate other geographic markets beyond Asia, and only time will tell how successful these plans are.

Terra has also recently made its intentions clear to strategically purchase more than $10 billion worth of Bitcoin that will be used as a reserve for UST.

Pros and Cons of TerraUSD (UST): Terra Network, Terra Blockchain, and UST Coins

Tether differs from volatile cryptocurrencies because it’s a stable coin. Let’s take a look at the pros and cons of Terra.

Pros:

• Various Terra Stablecoins Pegged To Multiple Currencies – Terra currently has multiple stablecoins pegged to different currencies, including TerraCNY (Chinese yuan), TerraEUR (euro), TerraBGP (British pound), TerraJPY (Japanese yen), TerraKWR (South Korean Won), and TerraSDR (the International Monetary Fund)
• CHAI E-Commerce Uses Terra – The CHAI platform has more than 2.5 million users and currently uses the Terra blockchain to facilitate payments and transactions. This shows the ability of Terra to succeed on a large scale.
• Yield-Bearing – Users can earn passive rewards from staking UST on applications like Anchor protocol.

Cons:

• There’s A Significant Amount Of Competition – TerraUSD has recently entered the crypto space, which means it is faced with steep competition. Regardless, it has still performed well over recent months but faces significant challenges as it tries to reach the top spot.