Terra and its UST stablecoin are part of a blockchain project that aims to be the backbone of the global payment system. Through Anchor Protocol and Mirror Protocol, they can act as a decentralized bank, providing higher revenue and lower fees. Its upcoming update Columbus-5 will bring greater efficiency and scarcity to LUNA.
In the past year, DeFi has been committed to becoming the next generation bank by eliminating middlemen and providing users with greater revenue opportunities. Many uses in DeFi come from stablecoins, which are tokens that are 1:1 pegged to another asset (usually the U.S. dollar). Most large stablecoins are centralized, which means that there is a registered entity holding the collateral of the stablecoin to ensure that it remains pegged. Although this is a simple solution, it also brings a lot of problems, because the centralized company behind the stablecoin can effectively control who holds it and what it can be used for, which makes them no better than our current payment solutions. The plan is better. Terra and UST stablecoins are solving this problem, and their rapid adoption has caused Terra's LUNA token to rise by nearly 500% in less than a month.
Terra was created by Do Kwon and Terraform Labs in South Korea. The Terra blockchain mainnet was released in April 2019, using LUNA as its native cryptocurrency. In some respects, Terra is similar to smart contract blockchains such as Ethereum in that it allows the creation and deployment of smart contracts on the Terra blockchain. However, it also has a unique feature that sets it apart from other projects: UST stablecoin.
UST is a decentralized algorithm stabilization mechanism, which means that it does not have the 1:1 support of the US dollar. Instead, it uses LUNA tokens as an algorithmic stabilization method. Anyone can mint UST by burning their own LUNA, so burning 1 dollar of LUNA will create 1 dollar of UST. This is also the reverse, so one dollar of UST can be burned to create a dollar of LUNA. This inherently binds the two tokens together and makes LUNA's success depend on the adoption of UST. The more UST that is cast, the more LUNA needs to be burned, which means a decrease in supply, which leads to an increase in prices.
The UST stablecoin was released at the end of 2020, and its market value has exceeded US$2 billion. Since its adoption is the main driver of LUNA's growth, the Terraform Labs team has been working to increase its adoption rate through a variety of methods. UST can be found on Ethereum, Polygon, Solana, Binance Smart Chain and the upcoming Polkadot. The Terra blockchain is also built using the Cosmos SDK, which means it will soon be interoperable with the entire Cosmos ecosystem.
UST is not only used for traditional DeFi activities, such as providing liquidity on Uniswap, but also has revolutionary DeFi applications based on the Terra blockchain. One of them is the Mirror Protocol, which is the largest synthetic stock agreement with a total value of close to US$2 billion. With Mirror, anyone can provide UST as collateral to mint stocks, such as Apple, Tesla or even GameStop. Then, they can use Oracle to peg their real-world price just like any other cryptocurrency token.
Another protocol built on Terra is the Anchor Protocol, which claims to be "the gold standard for passive income on the blockchain." The agreement allows users to deposit UST and obtain a stable annual rate of return of 20%. This high yield is achieved by using staking rewards from multiple blockchains (including Terra, Ethereum, Solana, and Polkadot). Anyone can deposit these cryptocurrencies in Anchor, and then use the proceeds of the tokens to achieve this interest rate.
On September 9, an exciting update that Terra will release is Columbus-5, which is the next upgrade of the Terra blockchain. The main function is to burn LUNA transaction fees. This will have an effect similar to that of EIP-1559 on Ethereum, and will be another way to reduce the supply of LUNA. It will also achieve more interoperability with top blockchains and further expand the influence of UST.
In the coming months, Terra holders have a lot to be excited about, which has been reflected in recent price movements. The main risk of holding LUNA is whether there is some unforeseen event that causes the UST link to be broken or lack of adoption of UST. However, as more and more blockchains and exchanges adopt UST, this risk becomes smaller and smaller, and UST is one step closer to becoming the backbone of the global payment infrastructure.