Terra’s Stablecoin UST Becomes Crypto’s Third-Largest


First DAI, now BUSD. Terra’s UST is on a tear. 

Today, the fast-growing TerraUSD (UST) stablecoin from the Terra ecosystem has hit another key milestone. With more than $17 billion in market capitalization, it’s become crypto’s third-largest stablecoin.

Terra’s stablecoin overtook Binance USD (BUSD) to grab third place, but the gap is thin: roughly $17 million.

The leading stablecoin as of this writing is Tether (USDT), which commands a whopping $82 billion market cap. USD Coin (USDC) is second at $49 billion.

Besides the difference in market caps, there’s also a fundamental difference in how these stablecoins are designed. 

What is Terra’s UST?

BUSD is a fiat-backed stablecoin, meaning the stablecoin’s custodian, in this case Paxos, holds the equivalent amount of BUSD circulating in cash, cash equivalents, or other traditional assets.

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USDC and USDT are built similarly, with attestations claiming that each company holds a dollar-equivalent asset for every stablecoin in circulation. 

Market capitalization of Tether (blue), USD Coin (Pink), Binance USD (Green), TerraUSD (Purple). Source: Coingecko.

Terra’s stablecoin is, however, built much differently. Instead of a centralized entity holding traditional assets, be it cash or bonds, this stablecoin is designed to keep its peg to the greenback via a mint-and-burn mechanism and savvy market arbitragers. 

Here’s how it works: To create one UST, users must first buy and then destroy $1 of LUNA (Terra’s governance and staking token). The inverse is also true: Each time you swap $1 of LUNA for UST, you destroy one UST.

Because one UST always equals $1 worth of LUNA, there are many opportunities to make a profit whenever the stablecoin deviates from its peg. If, for example, UST drops to $0.99, arbitrageurs can always swap that UST for a $1 of LUNA and bag a small profit. They also destroy that UST in the process (which reduces supply and makes the asset scarcer). 

It’s a unique mechanism, but it’s caught crypto by storm of late.

Not only has UST’s market cap jumped from just $2.8 billion to today’s figure in five months, but LUNA has also hit all-time high after all-time high along the way.

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