In the world of cryptocurrencies, stablecoins play a vital role, especially in the field of decentralized finance (DeFi). Terra is a blockchain project developed by South Korea’s Terra Labs, and its native tokens Luna and TerraUSD (UST) play an important role in maintaining price stability. This article will provide a comprehensive introduction to the Terra ecosystem and how it works, as well as discuss the importance of Luna and UST.
Terra Ecosystem Overview
Terra is a blockchain built on the Cosmos SDK, a framework on which developers can create custom blockchains and build Dapps for various application scenarios on Terra. The Terra ecosystem already encompasses over 100 original projects, including a range of DeFi platforms and Web 3 applications.
The Terra ecosystem was founded by Do Kwon, a former Stanford University computer science graduate. The current Terra ecosystem is on a surge, with UST's market value growing from US$180 million in early 2021 to nearly US$15 billion in March 2022, while Luna's price has soared 138 times.
Additionally, the Washington Nationals baseball team announced a five-year sponsorship deal with Terra’s organization in February 2022, worth $40 million. The baseball team reportedly plans to choose UST as a method of payment in the future.
Luna's role
According to Terra’s white paper, Luna is designed to achieve Bitcoin’s original goal: a peer-to-peer electronic currency system. To achieve this, Terra created a system of stablecoins whose value is pegged to different assets such as commodities or fiat currencies.
UST, the most popular stablecoin out there, tracks the price of the U.S. dollar so that the value of its UST token hovers around the $1 mark. UST achieves its peg to the U.S. dollar by using Luna, another currency in the ecosystem.
Luna plays a vital role in maintaining the price of the Terra stablecoin while also reducing market volatility, keeping it stable. Luna traded at $0.66 in 2021, ending the year at $89 before reaching an all-time high of $104.58 on March 9, 2022.
How UST works
Stablecoins are a special type of cryptocurrency whose price is typically pegged to a state-issued fiat currency, such as the U.S. dollar, as a way to maintain price stability. USDC and USDT rely on asset reserves to maintain price stability, while Terra assets rely on algorithms.
Terra Asset uses a smart contract-based algorithm to mint new UST tokens by permanently burning Luna tokens and fixing the price of UST at $1. The entire operation process is an arbitrage process, and users can earn small profits by discovering the price difference between different assets.
In the Terra ecosystem, users can exchange one Luna coin for UST and vice versa at a guaranteed price of $1, regardless of the coin’s prevailing market price. This means that if demand for UST increases and its price grows above $1, Luna holders can earn a risk-free profit by exchanging $1 of Luna for one UST token.
During the swap process, a certain proportion of Luna is destroyed and the rest is deposited into the community treasury. Funds from the treasury will subsequently be used to expand the utility of Terra ecosystem applications and services. Burning a percentage of Luna tokens reduces the number of tokens in circulation, making Luna tokens more scarce and therefore more valuable.
Similarly, if demand for UST is low and the price drops below $1, UST holders can exchange UST tokens for Luna tokens at a 1:1 ratio, which will be worth more due to Luna's scarcity, Therefore, users can earn risk-free profits.
Terra’s other stablecoins
While UST remains the most common stablecoin in the ecosystem, a range of other stablecoins can be pegged to various fiat currencies, such as:
TerraCNY (RMB)
TerraEUR (Euro)
TerraBGP (GBP)
TerraJPY (Japanese Yen)
TerraKWR (Korean Won)
TerraSDR (International Monetary Fund)
The IMF's SDR is one of the outliers because everyday users can't use or buy anything related to it. The SDR is a special unit of account used as an international reserve asset, calculated from a basket of fiat currencies from the world's largest economies.
Terra denominated all transaction fees, rewards and incentive contributions on the blockchain through TerraSDR, minimizing price fluctuations between currencies issued by different countries. After all, a basket of currencies can diversify risks, is more stable than a single currency, rarely suffers from violent fluctuations, and is crucial for determining stable rates and returns.
in conclusion
The Terra ecosystem plays an important role in the cryptocurrency market, and its native tokens Luna and UST are unique in the stablecoin space. Through smart contracts and algorithms, Terra has successfully achieved price stability for stablecoins, providing a reliable foundation for the DeFi field. As the Terra ecosystem continues to expand, we can expect more innovations and applications to emerge.