Stable coins are one of the most innovative technologies that propelled blockchain ecosystems in the past 5 years. The introduction of stable coins opened the flood gates for rebuilding almost all financial constructs of traditional financial systems on decentralized blockchains. UST is the one such stable coin and it is the US dollar equivalent of Terra ecosystem.
TerraUSD(UST) is the first decentralized stable coin that is sensor resistant, highly scalable, yield bearing and portable to any blockchain that supports smart contracts. The goal Terra UST is to the de-facto stable coin on every blockchain and be a solid alternative to centralized or over collateralized stable coins like USDC and DAI.
Terra’s Market Module
The heart of Terra’s blockchain is it’s Market Module which keep the stable coins pegged. This is achieved by expanding and contracting the supply of Terra’s LUNA to keep the peg stable. Lets take an example of how UST (the stablecoin ) is created and destroyed when demand increases or decreases. In order to mint 1 UST, one worth of LUNA is burnt instead of swapping UST for LUNA similar to the mechanics of Uniswap. When the demand recedes, UST is burnt by minting 1 dollar worth of LUNA token. This way Terra’s governance token LUNA tokens are used to maintain the peg .
Seigniorage & Community pool
With the initial version of Terra blockchain implementation, the LUNA captured when UST is burnt was called Seigniorage to moved to the community pool. This was known to cause inflation on Terra blockchain and led to LUNA token value depreciation. This was changed with Columbus – 5 implementation. With Columbus-5, the seigniorage is burnt but the community pool is funded by swap fees. These swap fees are used as rewards for the exchange rate oracle price feed provided by Validators.