Terra’s stablecoin maintains the peg algorithmically.
Terra network is enjoying not just the holidays but also the growth of its ecosystem.
Just last week, it went past Binance Smart Chain to become the 2nd largest Decentralized Finance (DeFi) ecosystem after Ethereum. It has pushed LUNA’s price which is currently trading for 98 USDT on Binance.
UST Achieves Market Capitalization
Now, its stablecoin UST (TerraUSD), as claimed by its cofounder, has become the first “decentralized stablecoin” to achieve a market capitalization of $10 billion.
UST is a stablecoin with a value equal to the USD fiat currency.
It is not backed by USD reserves. Rather, users have to burn the Terra protocol’s native token LUNA to mint new UST.
Similar to the International Monetary Fund’s (IMF) reserve asset named Special Drawing Rights (SDR). The Terra ecosystem has TerraSDR that tracks the price of SDR.
How does UST Maintain Its Peg in a Decentralized Manner
When the price of UST is higher than the peg due to demand-supply factors, the protocol incentivizes users to burn Luna and mint UST, increasing the supply of the stablecoin.
The reverse happens when UST’s price is lower than its peg, again due to demand-supply factors. Therefore, users are incentivized to burn UST and mint LUNA.
So, the price stability of UST is achieved through the algorithm that incentivizes the minting or burning of Terra through arbitrage opportunities.
Since the LUNA is a traditional decentralized cryptocurrency, it is minted through the incentive-based model by validators who verify the transactions and secure the Terra blockchain.
As per blockchain analytics platform Defi Llama, at the beginning of the year, Ethereum formed over 90% of the Total Value Locked (TVL) in all of the DeFi protocols it tracks. At the moment, it constitutes 62% of the market. Its dominance is being challenged. As Ethereum’s competitors grow, the market would become decentralized because more competitors mean less chance of market manipulation.
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