What is TerraUSD (UST) And Terra (LUNA)?

Cryptocurrency
First published
April 6, 2022
Last updated
July 5, 2022

The Terra protocol is a popular decentralized and open-source public blockchain protocol for algorithmic stablecoins. It is known to create stablecoins that consistently track the price of any fiat currency. Users can spend, trade, exchange, and save Terra stablecoins instantly, all on the Terra blockchain. Ahead, we explain TerraUSD (UST) and Terra (LUNA) - the two main coins of the Terra blockchain. 

What is Terra (LUNA)? 

As per Terra’s white paper, the founders wanted to fulfill what Bitcoin originally set out to be: a peer-to-peer electronic cash system. Hence, Terra deployed a system of stablecoins – cryptocurrencies whose value is pegged to different assets like fiat currencies or commodities. 

UST is thus far the most popular among them and tracks the price of US dollars wherein one UST token is pegged to 1 US dollar, according to Coinmarketcap. UST achieves its peg to the dollar through the use of the ecosystem’s other token LUNA. LUNA plays an important role in maintaining the price of the Terra stablecoins and balances the market volatility so that they remain stable. 

What is TerraUSD (UST)?

Stablecoins are a certain type of cryptocurrency, the price of which, is pegged usually to a fiat currency like the U.S. dollar. However, the Terra blockchain uses a different method to keep the price of stablecoins stable.

Instead of relying on off-chain collateral for maintaining their peg, as USDC and USDT do, Terra implemented a smart contract-based algorithm for keeping the price of UST anchored to $1. In the Terra ecosystem, users can swap one LUNA for UST, and vice versa, at a guaranteed price of $1 -  regardless of the price of either token at the time. This means that if the demand for UST rises above $1, LUNA holders can get a risk-free profit by swapping $1 of LUNA for creating one UST token.

During the swapping process, a percentage of LUNA is burned and the remaining is deposited in the community treasury. The funds in the treasury are then used for investing in applications and services that expand the utility of the Terra ecosystem.

Burning a percentage of LUNA tokens reduces the overall number of tokens left in circulation, making them more scarce and thus more valuable. When more UST tokens are minted, it gives the effect of diluting the existing tokens in circulation and brings the overall price back down to its $1 level.

Likewise, if the demand for UST is low and the price goes below $1 then UST holders can exchange their UST tokens at a ratio of 1:1 for LUNA – which is worth way more because of scarcity, and thus the user can avail of risk-free profit.

IMPORTANT NOTE

Hodlnaut will delist UST Classic (USTC) and LUNA Classic (LUNC) from 5 August 2022, 2 PM (GMT+8).

Please kindly withdraw all your USTC and LUNC from Hodlnaut asdeposits, withdrawals and swaps for these assets will not be processed after 5 August 2022, 2 PM (GMT+8).

Due to the delisting, we will also be removing USTC and LUNC interest statements. Please download a copy via the “Statements” tab before 5 August 2022, 2 PM (GMT+8) if you require a copy. However, we will keep previous USTC and LUNC transactions on the “Transaction” table.

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