The Decentralised Stablecoin that’s looking to capture the Stablecoin Space - terraUST

The era of decentralised stable coins has started, this means that we have stable coins with stable value pegged to the price of US dollar, but it’s not through collateralisation with the US dollar currency.

Traditional stable coins like USTD, USDC, Pax Dollar and others are issued by a central entity and their value is maintained to that of US Dollars with these central entities maintaining reserves of US dollars.

Now, a decentralised stable coin is gaining popularity, it’s the terraUST stable coin, that’s an algorithmic stable coin, not issued by any central entity but it maintains its peg to the US dollars through a mechanism of price stabilisation, by getting swapped for currency Luna at needed times.

Terra team is now focusing its efforts in increasing liquidity of its UST coin in decentralised applications in popular layer 1 blockchains as is evident in this article.

 What’s the point of DEFI, if the system functions using centralised stable coins!!

This is very interesting at these times as the popular centralised stable coins we are used to, look bound to be controlled by Government entities of the US, who want stable coin issuers to be licenced like banks are and be regulated by relevant Government entities. DEFI enthusiasts argue that the purpose of DEFI is destroyed if it operates using a stable coin that’s centralised and in Government control.

Dollar devaluation effect on traditional centralised stable coins

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Another aspect to note are the dangers of holding traditional centralised stable coins, because their value is based on the value of US dollars directly.

So, tomorrow if the value of US dollars depreciates, then the value of these stable coins also go down, so in that sense the value of centralised stable coins is not exactly stable.

All the negative effects of inflation that depreciates the value of US dollar, will be applicable to traditional centralised stable coins as well, because these stable coins derive their value from their dollar reserves.

 Troubling that popular stable coins are not 100% backed by US dollars

Also we know that these stable coins may not be 100% backed by US dollars, with the USDT stable coin being a controversial stable coin with it being collateralised by risky debt instruments like commercial paper.

Recently, it was revealed that even USDC was not 100% backed by US Dollar reserves, with a small percentage of USDC reserves backed by commercial paper. However, USDC has announced that it would only be backed by USD reserves and treasury bills from September.

USDC and Pax Dollars are considered reliable stable coins because they are transparent with their audits, still such news of stable coins that are not backed 100% by dollar reserves, is enough to make us consider alternative stable coins.

 Decentralised stable coins created by Terra Blockchain Ecosystem

TerraUSD is just one stable coin but the Terra ecosystem has other stable coins pegged to fiat currencies of other Nations - South Korea, Mongolia with terraKRT being the stable coin for the Sounth Korean fiat currency and terraMNT being the stable coin representing the Mangolian fiat currency.

There are already payment applications on Terra Blockchain like Chai, where payments can be done using terra stable coins like terraUST and terraKRT, instead of using fiat currencies.

Terra Stable coins maintain value with a price stabilisation mechanism with the Luna cryptocurrency

Brief explanation of how Terra stablecoins maintain their peg to the US dollars

Terra stable coins like terraUST maintain their peg by their value getting balanced by burning and minting it accordingly using the LUNA crypto currency that’s the native coin of the Terra Blockchain.

For ex, if the price of terraUST is much more than a dollar, then there is more demand for terraUST than its supply so terraUST’s supply will be increased by incentivising users to mint more terraUST by burning Luna tokens. In this instance, the price of LUNA would increase.

The opposite scenario plays out when terraUST’s value is low compared to its USD peg. Here, there is less demand for terraUST compared to its supply, so users will be incentivised to burn terraUST and mint Luna tokens, until terraUST reaches its intended value.

 Luna’s price prospect is super bullish with the demand for terra stable coins increasing

It’s evident that there is going to be demand for decentralised stablecoin TerraUST in DEFI, besides this as said terra stablecoins are already used for making payments through payment apps like Chai in some countries.

Terra stablecoins and terraUST are going to be in more demand in the coming future and because of this more Luna will be burned for minting Terra stablecoins, which will result in rise in price of Luna cryptocurrency. Therefore, I am very bullish on Luna’s price prospects.

Disclaimer : This article reflects my understanding of the subject and is not investment advice. Please do your research before investing and take responsibility for all your investment decisions.