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UST is a decentralized, algorithmic, stablecoin built on the Terra blockchain. It maintained its notional peg to the US dollar through a mint/burn function with the Terra chain’s main token, LUNA. Although there are plenty of algorithmic stablecoins on the market, UST is seen as the premier offering on the market and the largest algorithmic stablecoin by circulation, with nearly $14 billion in circulation at time of writing. This fact is reflected in LUNA’s impressive price gains over the last year, and LUNA’s current residence in the top ten cryptocurrencies by market cap. Since initially launching on Terra, UST has expanded to multiple blockchains, one primarily being Ethereum.

How Terra Rose to Prominence

Although the Terra blockchain has multiple use-cases, the stablecoin UST is its primary offering and the core function of the chain, and how the chain stamped out its territory on the marketplace. The Terra foundation has set up an actively working payment system in South Korea through the mobile payments operator Chai, and it is possible to pay with UST at thousands of convenience stores all over Korea. This move stole a march on other stablecoin rivals and helped contribute to a network effect that has generated active demand for the UST token.

How UST is Minted and Maintains its Peg

UST is minted by burning one dollar’s worth of LUNA (at current market price). LUNA can be retrieved from the protocol by burning 1 UST for one dollar worth of LUNA. This relationship helps Terra keep its peg to the US dollar. If UST is worth less than a dollar, arbitrageurs can send UST to the protocol, redeem LUNA, and pocket the difference.

This mechanism increases demand for UST (as profit can be made) as well as simultaneously contracting the overall supply, and thus the price of UST rises until it’s back to one dollar. If the peg overshoots, and UST is worth more than a dollar, then the process works in reverse, as arbitrageurs can mint UST for less than its current market rate. This expands the supply until UST is once again back to a dollar.

Unlike other stablecoin collateral methods, UST is not backed by anything except this binary orbit with LUNA. It means there are no centralised ‘off-chain’ reserves backing the currency, nor is there a treasury of crypto-currency acting as a collateral reserve. Rather, the algorithm, and confidence in the underlying LUNA token and the Terra ecosystem, is the only thing holding the peg. To some, this opens up UST to the possibility of losing its peg dramatically in the face of a serious system shock. To others, the fact that UST’s peg is a closed system in and of itself insulates it against everything except total failure of the Terra blockchain itself. It is still yet to be seen whether this will spiral out of control, but to date the Terra Foundation has kept UST’s market healthy.

Why UST will Continue to Grow

The most important advantage of UST is its ability to scale infinitely without impediment. UST can be minted indefinitely, as the LUNA price will simply keep rising to reflect the contraction of the token’s supply as it is burned for more UST. Other stablecoin methods either require larger and larger ‘off-chain reserves’ to guarantee redemption, or larger and larger crypto treasuries to maintain collateral-faith in the peg.

Other advantages include, interoperability with Web 3.0 economies thanks to Terra’s dropship, its rapid chain expansion to ecosystems like Ethereum, as well as the chance to mint other fiat-denominated stablecoins with minimal fees, for example, trading and holding TerraKRW (Korean Won). Terra’s vision is to have a global, Web 3.0 enabled currency that as well as earning yield in various DeFi protocols, can also be spent on a day-to-day basis in retail shops, with one wallet acting as both a savings account and payment system. It’s a heady goal, but judging by LUNA’s price-action over the last year, one which the Terra blockchain is close to achieving.

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How can I get UST?

Getting UST is easy on Numio. You can use your credit or debit card to purchase UST, you can swap or trade it for other ERC-20 tokens (up to 100x cheaper than other wallets), and you can send or receive it as a payment. Whatever way you choose you can be sure that you are always in full control of your UST.

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