This article was written before the Luna Crash.
The TerraUSD (UST) token is an algorithmic stablecoin minted on the Terra blockchain. Stablecoins track the value of more stable assets such as fiat currencies or precious metals.
This guide focuses on the differences between Terra’s native platform token LUNA and one of its most popular stablecoins, TerraUSD (UST).
You’ll learn what UST and algorithmic stablecoins are, how they’re created, what role LUNA plays in their design.
What is Terra LUNA?
Terra was created to serve as a user-friendly peer-to-peer electronic cash system. This is the same vision held by Bitcoin’s creator Satoshi Nakamoto who intended Bitcoin to become a digital alternative to fiat cash.
However, over the years, it has been proven that cryptocurrencies are notoriously volatile making them unsuitable for payments.
Terra creator Do Kwon set out to create an ecosystem that could support a digital asset that complemented Bitcoin: a fiat currency alternative and a platform to launch decentralized applications.
Launched in April 2019, Terra is a blockchain protocol for algorithmic stablecoins and decentralized finance (Defi) applications.
The stablecoins are based on popular fiat currencies such as USD, GBP, EUR, and JPY. The most notable Terra-based stablecoin is the Terra USD (UST) which is currently ranked third by market value among its peers.
LUNA is the native digital asset of the Terra ecosystem. It is a utility token for governance and staking. Most importantly, it serves as a stabilization asset for the algorithmic stablecoins through financial engineering and market incentives.
What Is Terra USD (UST)?
Terra USD is one of the algorithmic stablecoins hosted on the Terra platform. The value of the coin is pegged to that of the US Dollar on a 1:1 ratio. However, UST is not backed by USD reserves.
As an algorithmic stablecoin, the USD peg is not maintained by holding an equal amount of US Dollar reserves in offline accounts. Instead, the peg is maintained with the help of price-stabilization arbitrage in conjunction with its sister asset LUNA.
TerraUSD (UST) launched in September 2020 in a collaboration between Terraform Labs and Bittrex Global cryptocurrency exchange. Since then, the asset has grown not just in value but also in popularity and supply.
Terra so far has launched five stablecoins similar to UST:
- TerraCNY (Chinese Yuan);
- TerraEUR (Euro);
- TerraBGP (British Pound);
- TerraJPY (Japanese Yen);
- TerraKWR (South Korean Won).
To mint 1 UST, a $1 worth of the LUNA coin is burnt, thereby reducing the overall circulating supply of LUNA. The price peg on the USD currency is maintained as follows:
If UST is valued higher than $1, say $1.02, market participants are incentivized to profit from the price discrepancy.
A trader can burn LUNA worth $1 for 1 UST through arbitrage. They can then sell the UST at the market price, making a small profit.
This process increases UST supply, thereby reducing the price to equilibrium. The exact process is used to correct the UST price when it falls below the $1 peg.
Comparison between Terra Luna (LUNA) and TerraUSD (UST)
Terra LUNA is the native platform coin for the Terra ecosystem serving multiple purposes, including
- Governance – LUNA stakeholders can make improvement proposals and vote on them;
- Staking – the Terra network depends on a proof of stake mechanism to achieve consensus. Stakeholders who do not wish to be validators can stake their coins to earn passive income;
- Stabilizing stable coin prices – LUNA is instrumental in ensuring that Terra-based stablecoins maintain their pegs to respective fiat currencies.
On the other hand, TerraUSD (UST) is one of the several stablecoins created on the Terra blockchain tracking the price of the US Dollar currency.
Its price is algorithmically controlled using LUNA and market incentive or arbitrage. This is unlike most popular stablecoins such as Tether (USDT) or USD Coin (USDC), which rely on assets reserves.
Here’s a brief rundown on the main differences between LUNA and UST:
Essentially, UST is a derivative token created to serve as digital cash. It can be used for value transfer while maintaining the price peg to the US Dollar currency.
Accordingly, to mint 1 UST token, only $1 worth of the reserve asset (LUNA) must be burned in a process called seignorage.
Several other derivative tokens similar to Terra USD (UST) have been created on the Terra blockchain. They include:
- TerraCNY (Chinese yuan);
- TerraEUR (Euro);
- TerraGBP (British pound);
- TerraMNT (Mongolian tugrik);
- TerraJPY (Japanese yen);
- TerraKWR/KRT (South Korean won);
- TerraSDR (the International Monetary Fund).
Learn more: Terra Luna Vs. Atom
Frequently Asked Questions
Which Is Better?
When comparing Terra LUNA and TerraUSD, none of the two can be said to be better or worse than the other. They are complementary assets with different uses.
LUNA is used to regulate the price of Terra stablecoins including UST while UST coin is used for value transfer within the various Defi protocols on Terra and external markets.
However, depending on the investors’ goals and needs, one asset may be better suited or applicable than the other.
What Makes Terra Luna Special?
Terra Luna has several benefits that make it special. As a blockchain platform, it has the following advantages:
- It’s highly scalable due to its employment of the Delegated Proof of Stake consensus mechanisms based on Tendermint by Cosmos. Theoretically, it can handle as many as 10,000 TPS
- Terra blockchain is a smart contract platform enabling developers to create and launch their decentralised applications. So far, close to 100 projects are running on the ecosystem.
Interested in learning how Terra and Cosmos fit together?
As a cryptocurrency, LUNA is instrumental in the Terra ecosystem serving the following purposes:
- It is used for value transfer within Terra.
- LUNA is used to stabilise the value of Terra stablecoins.
- The coin is used for governance of the network.
- LUNA stakeholders can participate in staking for passive income or verifying transactions as validators.
What Is TerraUSD Crypto?
TerraUSD is an algorithmic stablecoin minted on the Terra blockchain tracking the value of the US Dollar currency.
Its ticker symbol on cryptocurrency exchanges and other trading platforms is UST. Currently, it is ranked among the top most valuable stablecoins, with a market value of about over $15B.
Learn more: Terra Luna Vs. Fantom
Is Terra Luna Deflationary?
Yes, it is. Whenever a seignorage event happens where a Terra stablecoin is minted, some LUNA is burned out of circulation, reducing the total amount of available LUNA coins.
Is UST A Stable Coin?
Yes, UST is an algorithmically created stablecoin hosted on the Terra blockchain tracking the value of the US Dollar currency.
However, UST relies on algorithms to maintain its peg to the USD, unlike most other stablecoins, such as USD Tether (USDT) or USD Coin (USDC), which use reserve assets.
Is Terra Built On Ethereum?
No, Terra is not an Ethereum project. Instead, Terra is a standalone blockchain network built on the Cosmos SDK and using the Tendermint-based Delegated Proof of Stake (DPoS) consensus mechanism. However, like Ethereum, Terra can also host smart contracts.
Learn more: Terra Luna Vs Bitcoin (What’s The Difference?)
Is Terra Luna Decentralized?
To an extent, yes, Terra is decentralised. There are several benefits to using staking as a consensus mechanism. Firstly, it’s easier for stakeholders to participate in the governance of the network.
The ease of acquiring LUNA means that more people can take part in proposing improvements to the network, voting on important issues and even validating transactions.
Is Terra Luna A Blockchain?
Terra Luna is a fully-fledged blockchain network built on the Cosmos SDK (software development toolkit).
It uses the Delegated Proof of Stake (DPoS) mechanism to achieve consensus amongst its hundred validators.
Like Ethereum, Terra is a smart contract platform on top of which dApps can be deployed.
Also read: Can Terra Luna Be Mined?
Are UST And LUNA The Same?
UST and LUNA are not the same assets. UST is one of the several stablecoins within the Terra ecosystem used to track the value of the US Dollar fiat currency. It is a stablecoin pegged to the USD.
LUNA, on the other hand, is a native digital asset to the Terra protocol that is used to maintain the pegged value of the Terra stablecoins, UST included.
Is Terra Luna A Good Buy?
LUNA could be a good buy depending on multiple factors such as:
- Investor goals – these include profitability goals, asset portfolio, etc.;
- Timing – LUNA is a highly volatile asset and if the investor looks to make short-term plays, timing becomes a big consideration. Buy at the wrong time and there is a big chance that you will lose your investment;
Therefore, determining whether LUNA could be a good buy is a highly subjective matter.
What Is The Relationship Between Luna And UST?
LUNA and UST are algorithmically dependent on each other. Terra stablecoins led by UST are pegged to various fiat currencies and the peg is maintained by financial engineering and market incentives.
Whenever the price of the stablecoins deviates from its peg, LUNA will either be burnt or minted to regulate their supply. By reducing or increasing the supply of any asset, market forces will push or pull the price to the appropriate level.
Learn more: Terra Luna Vs Polkadot
Is UST Backed By Luna?
No, Terra’s stablecoins, which include TerraUSD (UST) are not backed by LUNA. There are no LUNA reserves that correspond to every stablecoin on the Terra ecosystem. Instead, LUNA serves as a price regulatory mechanism whereby a variance from the peg causes an arbitrage opportunity.
Market participants are incentivized to profit from such a discrepancy and thus will burn or mint LUNA coins to increase or reduce the stablecoin’s supply. A change in supply will lead to a corresponding change in the price to bring it back to its pegged level.
How To Get UST On Terra
The easiest way to buy UST is to get it off a cryptocurrency exchange. So far it is supported on most major platforms including:
- KuCoin; and
However, if you already own some Terra LUNA coins in a self-custody wallet, the other easiest way to do it is to swap. You can use the Terra Station wallet’s swap feature to swap your LUNA coins for UST tokens.
Terra LUNA and Terra USD (UST) are innovative and highly valuable assets in the marketplace.
As discussed in this guide, the two are entirely different assets, but both are created within the Terra ecosystem. Their differences ensure that they do not compete but instead complement each other. Investors will probably find value in holding both.