TerraUSD (UST) is a stablecoin hosted by the Terra network and created by Singapore’s Terraform Labs. TerraUSD is one of a number of Terra stablecoins pegged to key currencies. (Another example is TerraKRW, pegged to the South Korean won.)
The stability of the TerraUSD price is maintained indirectly via the “base” TerraSDR coin, which is pegged to the value of the International Monetary Fund’s (IMF) special drawing rights (SDR). The SDR is simply a unit of account defined in terms of other currencies including the U.S. dollar and the euro. SDRs were created by the IMF in 1969 to assist states struggling with financial liquidity. The SDR is useful for Terra because it shows lower volatility than any given currency trading against another.
The Terra system commits to be the counterparty to anyone wanting to swap TerraSDR with luna at the target exchange rate. For instance, if a TerraSDR was trading cheaper than one actual SDR, then a user would be able to profit by swapping one TerraSDR with the system in return for one SDR’s worth of luna. This swap would push down the supply of TerraSDR and push its price back up toward the target.
This means the system mints new LUNA in order to buy back TerraSDR when the price of TerraSDR falls below a certain level. It burns the TerraSDR that it acquires in doing so. Conversely, it mints new TerraSDR to sell when the price rises too high, then burns the LUNA it gets paid.
This, in turn, pegs the values of all of the other Terra stablecoins, because users are always permitted to exchange TerraUSD and the rest for TerraSDR at the effective market exchange rate between the underlying currencies and SDR.
How does UST work?
The Terra network is a proof-of-stake (POS) blockchain, meaning a randomly selected validator proposes a new transaction block after “staking” some of their luna coins. If a certain number of other validators attest to the block’s validity, the proposer is rewarded. Otherwise, that person may lose his or her stake.
The network rewards validators through a small fee from every Terra transaction. The transaction fees and the validator rewards are denominated in TerraSDR.
The Terra blockchain hosts a decentralized application (dapp) called Anchor, which takes deposits in Terra stablecoins and aims to pay a stable interest rate in a marketplace characterized by volatility. Anchor also offers loans with staked crypto assets from major proof-of-stake blockchains as collateral and passes on a variable fraction of the yield those stakes generate to its depositors.
Other dapps on the Terra network include Ozone, an insurance product, and Mirror, through which users can take on exposure to U.S. equities without actually buying them.
Key events and management
South Korean national and Stanford computer science graduate Do Kwan founded Terraform Labs in 2018.
In July 2021, the company raised $150 million from investors including Arrington XRP Capital, Pantera Capital, Galaxy Digital and BlockTower Capital. The funding went to Terra’s Ecosystem Fund, which sponsors projects on the Terra blockchain. Prior to that, the company had raised $25 million in January of the same year from a similar pool of investors.
Do Kwan was served with a subpoena by the U.S. Securities and Exchange Commission (SEC) in September 2021, asking him to testify to the regulator regarding Terra’s Mirror Protocol. The following month, he and his company sued the SEC alleging the subpoena had been improperly served and that the SEC had failed to keep its investigation confidential because Kwan had been served in person at a conference.
Also in September 2021, the Terra blockchain completed its Columbus-5 upgrade, which allowed users to transfer Terra assets onto other blockchains including Ethereum and Solana.
In November 2021, a popular vote of the Terra community decided in favor of burning almost 89 million LUNA tokens and minting 4 million to 5 million TerraUSD coins. This was designed to stimulate the growth of the Ozone insurance protocol on the Terra network and led to a fresh surge in the value and market capitalization of LUNA.