Decentralized Applications

Decentralized applications need decentralized money to truly be considered decentralized. Recent news surrounding Tether, the world’s largest stablecoin, reminded me of this. If you would like to learn more about Tether, Martin Gaspar just published a detailed report explaining the mechanisms of Tether. Today, I want to talk about the second-largest decentralized stablecoin. The decentralized dollar built on the Terra Blockchain, UST. UST is an algorithmic stablecoin, a digital asset that is pegged to the dollar’s value. UST is created by buying and burning an equivalent dollar amount of LUNA in the market.

LUNA

LUNA is the asset that collateralizes the UST stablecoin. LUNA needs to be a productive asset to ensure the price will never be $0. $1 worth of LUNA will always be interchangeable with 1 UST. LUNA can be thought of as the native token to Terra’s blockchain, such as ETH is to Ethereum. Demand for UST means more LUNA gets burned, and vice versa. This burning function allows market forces to help maintain the $1 peg. When UST is trading above $1, LUNA holders can swap $1 worth of LUNA for UST at the peg and trade out of it, when thousands of people realize this and carry out the arbitrage trade, the peg will be maintained. LUNA, the collateral backing this decentralized algorithmic stablecoin can be thought of as deferred spending. LUNA needs to be a productive asset for people to be convinced to hold it.

Terra Blockchain

LUNA is the native currency for the Terra Blockchain, which is a Proof of Stake blockchain. LUNA holders can stake their LUNA asset and receive transaction fees from the activity on the Terra blockchain. LUNA holders may also receive airdrops from teams building on Terra. UST is a cross-chain stablecoin, live on the Solana, Ethereum, and Harmony blockchains as well as on Terra. UST’s marketcap is below $3 billion. This is relatively small compared to Tether’s $70 Billion and Circle’s $33 Billion in outstanding stablecoins.

In my personal opinion, decentralized applications will prefer decentralized money.