UST & LUNA Listed!

In celebration of listing Ethereum-based UST and LUNA from the Terra Ecosystem we wanted to explain the relationship between the two assets. This piece is meant to introduce you to Terra’s mission and its importance in the digital asset ecosystem. We do this by understanding the design behind UST, a decentralized algorithmic stablecoin collateralized by LUNA.

Introduction to Terra’s USD and LUNA

TerraUSD (“UST”) is a decentralized algorithmic stablecoin built on the Terra Blockchain. Unlike most stablecoins backed by fiat currency, UST is collateralized by Terra’s native asset LUNA. A “decentralized algorithmic stablecoin” may sound a bit intimidating at first, but in my opinion, it could be one of the most important financial innovations within the digital asset industry.

Why UST?

Decentralized applications need decentralized money to be truly decentralized. 

Right now, Tether and USDC are the two most used stablecoins with $100B in outstanding supply, representing over 75% of all outstanding stablecoins. Both firms have said their stablecoins are backed 1:1 with fiat currency, the United States dollar. Maybe crypto participants are comfortable trusting them, but these pie charts are not easily verifiable.

Self-Sovereignty

In my opinion, the beauty of crypto is self-sovereignty, where you can verify that the money you are holding is yours. So with existing stablecoins it is difficult to verify that the underlying fiat backing your stablecoins are there. Generally, you have to place your trust in the institution’s reports claiming the stablecoins are backed by fiat and fiat equivalent financial products.

This has created a demand in the crypto market for something called “decentralized stablecoins.” Money that is created by protocols instead of financial counterparties. Today I will explain the second largest decentralized stablecoin, Terra’s UST, according to Messari.

UST is the stable unit of account of the Terra ecosystem. The decentralized stablecoin is also present on many other blockchains such as Ethereum, Solana, Harmony, and Cosmos’ Inter-connected Blockchain (“IBC”).

Relationship Between LUNA and UST

UST allows applications across the crypto ecosystem to have a stable unit of value used for their medium of exchange. Since it is a stablecoin, this may give confidence to transact and know that the volatility of crypto-assets won’t affect their commerce. LUNA, on the other hand, may go up and down in value based on supply and demand.

Terra’s mechanics work so as to mint 1 UST, $1 worth of LUNA must be burned. This ultimately allows UST’s supply to be infinitely scalable as long as LUNA’s market value is above 0.

As there is more demand for UST, more LUNA will be burned. 

And vice versa. In times of contraction of demand for UST, more LUNA will be created when users burn the UST for LUNA. This is the entire relationship in a nutshell. UST demand goes up, LUNA supply goes down. UST demand goes down, LUNA supply goes up.

Productive Collateral

LUNA best represents a user’s deferred spending. In order to create UST, you need to burn $1 worth of LUNA.

Akin to other blockchain models, fees from transactions on Terra’s blockchain are earned by the validators who secure it. Specifically, LUNA can be easily staked to one of these validators that secure the network. Those staking LUNA receive a portion of the fees from the validator. This is important because as long as there is activity on Terra, LUNA stakers will have a claim to their fees, and should be priced above $0.

Developers, via new applications on the Terra blockchain, have created even more use cases for LUNA. For example, Anchor Protocol built on the Terra blockchain aims to increase the productivity of LUNA. Proof-of-stake assets, such as ETH and LUNA, are accepted as collateral for taking out a UST loan within Anchor Borrow. At the time of this writing, users are borrowing over $1,000,000,000 UST and have over $5,000,000,000 UST in Total Value Locked, which means the total value of collateral and deposits.

Concluding Thoughts

As developers build utilization for UST and create more use cases for LUNA via novel applications, the Terra ecosystem may continue to grow. Furthermore, Terra’s adoption on other blockchains, such as Solana, Ethereum, Harmony, and Cosmos, continue to be a focus of the Terra community – evidenced by 269M LUNA governance tokens voting in favor of enabling IBC, out of 345M possible. This is approximately a 78% voting participation rate. To date, over 3 million Terra accounts have transacted over 20.5 Billion in UST value, according to on-chain analytics on Terra Station.

In my opinion, Terra’s stablecoin design is in a unique position to deliver on the promise of a truly decentralized future for money.

More about LUNA and UST

While I tried to keep this short and sweet, there are many great minds writing about the Terra ecosystem. There is much more to learn about this ecosystem. If you are interested, here are a few of my favorite resources to learn more!

Quick Primer

How Does UST Work? (Angel Protocol)

Introduction from Terra

Announcing TerraUSD (UST) – the Interchain Stablecoin (Do Kwon)

Deep-Dive

The stablecoin printing press that’s just getting warmed up (Steve McKeon and Derek Schloss)