Huge milestone for decentralization as Terra UST flips BUSD

Gabriel V. Gabriel V.
20 Apr 2022
3 min read
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A Huge milestone for decentralization as Terra UST flips BUSD

Demand for the decentralized algorithmic stable coin rises, pushing Terra's UST to the third-largest stable coin by market capitalization.

TerraUSD, also known as UST, is an algorithmic stable coin from Terra Labs that is not backed by any type of collateral as over-collateralized or fiat-backed stable coins. For each UST minted, one dollar worth of LUNA, the native Terra network token, must be burned. 

This week, the fast-growing stable coin hit another milestone as it overtook the Binance USD position in the list of the crypto market's largest stable coins by market capitalization. Surpassing the astounding $17 billion mark it now becomes the third-largest stable coin. 

A huge leap toward decentralization?

At the time of writing, the leading stable coin is Tether(USDT) with an $82 billion market cap, followed by USD Coin(USDC) with $49 billion. 

The main difference between TerraUSD and the last three mentioned stable coins lies in backing and centralization. BUSD is a fiat-backed stable coin, which means, the stable coin’s custodian, Paxos, holds the equivalent amount of BUSD circulating in cash, or other traditional assets. The same principle applies to USDC and USDT.

UST is built with a mint and burn mechanism. LUNA maintains the anchoring of UST to USD through an arbitrage and seigniorage mechanism. LUNA token's main purpose is to absorb the volatility in UST, serving as a reserve asset in the process.

So, there is no centralized entity holding assets to back it. Although that looks good, there are also some issues, as more than 70% of UST in circulation sits alone on only one Terra protocol, Anchor.

Anchor protocol is a lending and borrowing service, with a juicy 19.5% yield on UST deposits. As all that demand is locked in one protocol, there are some doubts about its decentralization.

Despite the doubts, UST grew from $2 billion to $17 billion in an astounding five months, taking LUNA price to all-time highs, one after another. Constantly settling its foot all over other networks and ecosystems, integrating Avalanche, Solana, Cosmos, and of course, Ethereum.

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Gabriel V.
Gabriel V.
About the Author

Crypto researcher, investor and trader. Technical and data analyst.

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