Quick Rundown on Terra
KRT and UST are based on the Cosmos-powered Terra blockchain and its native token, LUNA. UST has been described to fit into the family of stablecoins known as “algorithmic central banks” (think FEI and CELO), that differs from “full reserve crypto-stablecoins” (think MakerDAO’s DAI) and “seigniorage shares stablecoins” (think Basis, ESD and DSD). Take note that UST is described as seigniorage by the official Terra docs . I’ve also seen seigniorages generalized as algo-coins.
Terra utilises the Delegated-Proof-of-Stake (DPoS) consensus mechanism, whereby LUNA is staked/delegated to secure the network for rewards in the form of transaction fees (both gas and taxes/stability fees) and seigniorage rewards. LUNA is also used to mint UST — $1 of LUNA converts to $1 UST at the current market price of LUNA. This is the “central bank” aspect, whereby the system’s job is to maintain a $1 peg of the UST by adjusting its supply according to market demand.
When demand for UST exceeds its supply in the market, the price of UST breaks peg above $1, let’s say to $1.05. LUNA holders are incentivised to mint 1 UST with $1 worth of LUNA, and sell it in the open market at $1.05, effectively netting a profit of $0.05 per UST minted risk-free. You might imagine how the price of LUNA effectively appreciates when demand for UST skyrockets. The reverse happens when UST falls below its $1 peg — UST can be bought at the discounted price to redeem LUNA. In this case, more LUNA enters into circulation, likely pushing the price of LUNA down.
Terra’s model might seem reminiscent of MakerDAO’s DAI, with a key difference being that there is no collateral to liquidate with regards to UST.
Staked LUNA follows a 21-day unstaking process, effectively taking supply out from the market. As of writing, 34% of all LUNA are currently staked. In a rising market, this creates a perfect storm for parabolic moves (for better or for worse).
Conversely, should the demand for Terra’s stablecoins plummet and continue to do so, so would the price of LUNA. Tokens used primarily for speculation typically crash should a bear market occur. We’ve seen that happen time and time again. Should Terra’s stablecoins be primarily used for speculative purposes, we’d also expect LUNA to perform poorly in a bear market. Luckily, Terra has managed to achieve its initial steps to real-world adoption via its Chai app.
Check out their official documentation for more details about Terra’s stablecoins here.
