A Look At UST | Is The Terra Money UST The Decentralized Stablecoin That DeFi Was Waiting For?
Stablecoins continue to be one of the hot topics in crypto. Regulators are now watching closely on all stablecoins, especially the centralized ones like Tether USDT, USDC etc. DAI has been the long term champion in the decentralized stablecoins arena, but now it seems that it has a legit contender in UST.
I have already mentioned that I personally I’m not a fan of DAI because of its overcollateralization and capital inefficiency. While it may sound great to have a stablecoin that is 200% backed with assets, the markets doesn’t want this. It locks to much capital.
The FEI stablecoins was one attempt to create a different and more efficient stablecoin, but it had its issues and being an Ethereum token probably didn’t help towards to goal.
What is Terra Money?
Terra Money is a whole new protocol and blockchain based on the Tendermint tech, the Cosmos blockchain is build on. The Rune protocol also uses this tech.
It is a proof of stake PoS blockchain.
There is a 130 validators that are assigned to run the nodes. They are elected based on their voting power (own stake) and other voting power who delegate the stake to them. The native token to the protocol is LUNA.
One of the underling function of this blockchain is to mint stablecoins like USD, EUR, YUAN, KRW, etc.
How Does Terra Money Works?
Terra Money is a protocol that in theory can create a multiple stablecoins, not just the USD dollar pegged TerraUST or just UST for short. It can create TerraEURO, TerraKRW etc.
How are all these stablecoins created?
The way the stablecoins are created is basically by conversion of the native token LUNA to any of the other stablecoins. For simplicity we will be looking at the LUNA and UST currency here.
LUNA is the native token to the protocol. It is being used for governance to elect validators and they are receiving staking rewards in the LUNA token.
Staking rewards come from three sources: gas (compute fees), taxes, and seigniorage rewards.
To create one new token that is equal to one UDS, users need to convert LUNA to UST, burn LUNA in the process and mint UST. The validators also work as a price oracles providing price rates at which the conversions is happening. If the value of the UST is a bit higher at some exchanges, then users can mint UST from LUNA and make arbitrage on this.
Also, if the price of the stablecoin drops below the peg (1 USD) on external exchanges, the protocol offers an exchange rate of one dollar in terms of LUNA tokens, so users can buy the UST on exchanges for lower prices and exchange it on the protocol for one dollar in LUNA and make a profit.
What this means is basically the native token is acting as the collateral for all the stablecoins, providing an option for conversions in both ways. (sounds familiar? 😊).
Yes, conversions and transactions in general are not free on the Terra blockchain. There is a basic fee for every transactions that is set by the validators, and plus there is a tax on top of it.
The tax system depends on the current economic situation but basically works like this.
- Demand goes up, lower the tax
- Demand goes down, increase the tax
When the demand is up and more stablecoins are needed, the tax is set lower, meaning less LUNA burned in the process of conversions, resulting in more LUNA supply and when the demand is down, a higher tax is set resulting in more LUNA burned in the process.
There are three terms that the blockchain uses for the LUNA tokens:
Unbonded LUNA is liquid LUNA that can be transferred around freily. The bonded LUNA is locked/staked and can only be delegated, but not transferred around. If the user wants to unlock its tokens then he needs to unstaked them, putting them in a unbonding mode, that last for 21 days.
One of the key points here is the unstaking period that last for 21 days, in which users can't do anything with their funds but wait. We are seeing more and more of a long term periods presented in crypto and defi and this is one more case. The 21 days unlocking period shows a commitment for the project.
Market cap numbers
The LUNA token has been very successful in the last period. At the moment of writing this it is a no.12 position on CMC with 14B in market cap. The UST stablecoin has also gowned immensely and now it has a 2.6B in liquidity. The token is starting to get recognition from a lot of defi apps and I can see it now in a lot of defi application where a yield is giving out for holding it as a stablecoin. This mean it use is growing. The stability of the token in the period has been great.
This is just a rough overview of the Terra ecosystem. You can read more here:
Lessons for HBD
UST seems to be growing and succeeding as a decentralized stablecoin. The native token LUNA has already surpassed the DAI governance token MAKER. The UST is also growing in liquidity and adoption and probably soon it will surpass the DAI marketcap.
TerraUST design is unbelievable similar to HBD.
For Hive, both the HIVE to HBD and HBD to HIVE conversions have a time delay of three days. While this prevents price manipulations, like the flash loans attacks we have seen in defi, it is still a long period for fast price feedbacks for a stablecoin. For starters we might do ok if we set it say for one day.
There is a fixed fee for the HIVE to HBD conversion of 5% basically (1.05 HBD price), but zero fee for HBD to HIVE. There need to be fees for the both directions that will burn HIVE, but they need to be lower, probably less then 1%, or maybe max at 2%. The fees level can be a witness parameter and set depending on the market conditions.
Bridges. Having a decentralized stablecoin in an isolated environment like the Hive ecosystem wont go to far. Terra has it native bridge to Ethereum. From here on it is used in all the defi apps. If Hive manages to create a great bridge to Ethereum and the other EVM chain, the HBD can then start being used on all the external defi apps, driving the demand and growing the overall ecosystem.
All the best
Some other platforms reviews I have done recently:
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