What Is TerraUSD (UST)?

TerraUSD (UST) is a decentralized, algorithmic stablecoin designed to power the Terra blockchain ecosystem. Pegged to the US Dollar, UST offered a scalable and yield-bearing solution for decentralized finance (DeFi) applications. Launched in September 2020 in collaboration with Bittrex Global, TerraUSD was created to address scalability challenges faced by stablecoin competitors like Dai, aiming to deliver enhanced scalability, accurate interest rates, and seamless interchain utility.

This blog explores the features, history, and fate of UST, including its depegging incident and the subsequent changes in the Terra ecosystem.

The Founders Behind TerraUSD

The Terra blockchain, including TerraUSD, was founded by Do Kwon and Daniel Shin under Terraform Labs, a subsidiary of Terra Alliance.

• Do Kwon, the CEO, previously worked as a software engineer at Microsoft and Apple and founded Anyfi, a decentralized wireless mesh network startup. His accolades include being featured on the Forbes 30 Under 30 list.
• Daniel Shin, an accomplished entrepreneur and economist, co-founded Fast Track Asia and Ticket Monster (TMON), a leading e-commerce platform in South Korea.

What Makes TerraUSD Unique?

1. Enhanced Scalability

TerraUSD employs an algorithmic minting mechanism that burns Terra’s native token, LUNA, to create UST. This ensures that UST’s supply dynamically adjusts to meet demand without undermining scalability.

2. Seamless Exchange

UST shares liquidity across the Terra ecosystem, enabling low-cost exchanges with other Terra stablecoins, such as TerraKRW (pegged to the Korean Won).

3. Yield-Bearing Potential

UST users could generate passive income through Anchor Protocol, which promised a near 20% return on UST deposits. Anchor derived these returns from staking rewards on proof-of-stake blockchains and borrower interest.

4. Interoperability

With the Dropship protocol, UST could connect different blockchain ecosystems, enhancing its integration with DeFi platforms and enabling cross-chain asset movement.

The Depegging of UST: A Historic Downfall

On May 9, 2022, UST lost its dollar peg, plummeting to $0.68 and sparking widespread panic. The depeg was caused by:

1. Liquidity Drain
   Large-scale withdrawals from the Curve pool, where UST was exchanged for other stablecoins.
2. Short Selling of LUNA
   As UST’s collateral, LUNA faced immense sell pressure, leading to its rapid devaluation.
3. Minting Excess LUNA
   To stabilize UST, Terra minted excessive LUNA tokens, causing hyperinflation and further eroding investor confidence.

Efforts, including a $1.5 billion Bitcoin reserve sale, failed to restore UST’s peg. The incident, likened to a bank run, left UST holders with massive losses.

The Role of Luna Foundation Guard (LFG)

The Luna Foundation Guard (LFG), tasked with managing Terra’s ecosystem, played a pivotal role. Before the depeg, LFG aimed to accumulate $10 billion in Bitcoin reserves to back UST. However, during the crisis, these reserves were liquidated in a bid to stabilize the peg, which ultimately proved unsuccessful.

UST and LUNA: The Revival Plan

Post-depeg, Terra underwent a major transformation:

1. Terra 2.0
   The community voted to create a new Terra blockchain, dubbed Terra 2.0, leaving the original chain as Terra Classic.
2. TerraClassicUSD (USTC)
   The depegged UST was rebranded as USTC and continues to trade on Terra Classic, though it is considered a defunct stablecoin with no plans for revival.
3. LUNA Token
   Terra 2.0 introduced a new LUNA token, with most DeFi projects migrating to this new chain.

Anchor Protocol and Yield Reserve Top-Up

The Anchor Protocol was central to UST’s appeal, offering a high-yield savings option for UST holders. However, maintaining the 20% yield rate strained the protocol’s reserves. In February 2022, Do Kwon announced a $450M top-up, bringing the yield reserve to over $500M, but concerns over sustainability persisted.

Where Can You Buy UST?

Before the depeg, UST was widely available on platforms like KuCoin, Uniswap, Bittrex, and PancakeSwap. However, UST (now USTC) is primarily traded on Terra Classic and is no longer actively supported.

Final Thoughts

TerraUSD (UST) was a groundbreaking innovation in the stablecoin space, offering scalability, interchain functionality, and attractive yields. However, its algorithmic design and dependency on LUNA ultimately led to its downfall. The incident underscored the risks inherent in algorithmic stablecoins and reshaped the broader cryptocurrency landscape.

While UST may no longer exist in its original form, its legacy serves as a cautionary tale for the evolving DeFi ecosystem.