Stablecoins don’t have to be at the mercy of a company that promises to keep them aligned with fiat.
Decentralized stablecoins exist for four years already, since MakerDAO issued its first DAI in 2017.
DAI keeps its 1:1 peg to the USD through the system of Ethereum-based smart contracts managing an overcollateralized loan: users deposit ETH and borrow newly created DAI coins.
DAI was the leading stablecoin for years… until another algorithmic stablecoin came along.
Terra’s stablecoin TerraUSD (UST) has recently flipped DAI in terms of market cap, surpassing $9Tr.
Terra uses a different approach: it is a blockchain in itself that helps its stablecoins achieve price stability via an elastic money supply (contracting and expanding when price deviates from the peg), enabled by stable mining incentives (miners absorb supply contraction costs in the short term and are compensated with increased rewards in the mid to long term).
Terra uses a PoS consensus, which means that miners must stake its currency LUNA to add transactions to the blockchain. The algorithm also uses LUNA to balance the USD peg in miner incentives, and users burn it to pay for minting stablecoins (thus reducing the overall supply, which is always a good thing for the price).
Since its launch in 2019, Terra has seen an impressive growth, and many other projects are now being built on it (it is a blockchain after all). Its interoperability is developing too: the Inter-Blockchain Communication protocol now live on Terra allows it to communicate with DApps in Cosmos ecosystem, with UST and LUNA seamlessly travelling between the chains.
A platform with in-built stablecoin and DeFi functionality is an interesting concept, and so far it has been rather well perceived: LUNA currency has reached its all-time high today.
Another one to follow closely ?