Stablecoins are digital assets that have their value tied to that of a single underlying asset, most often a fiat currency like the dollar. Tether and other stablecoins of the first generation keep their prices stable by using a diversified asset pool that includes fiat currency reserves.
However, some proponents of decentralization contend that a centralized institution keeping a basket of real-world assets presents the system with a single point of failure. This brings with it dangers such as opacity over governance structures and whether the total reserves held the line up with what is declared, which in turn becomes a focus for the attention of regulatory bodies.
Decentralized stablecoins try to circumvent these governance difficulties by attempting to keep their pegs through algorithms rather than through the maintenance of massive cash reserves or debt.
One example of this algorithmic stablecoin is TerraUSD (UST), which Terraform Labs manufacture. (Others are linked to a variety of national and international currencies.)
It plans to accomplish this by establishing a network of arbitrageurs who will purchase and sell Terra’s volatile cryptocurrency known as LUNA. This will allow it to keep its peg to the U.S. dollar (also, confusingly, known as Terra). The ownership of a LUNA coin confers voting rights on the underlying protocol, making it a governance token.
Terraform Labs’s system is less of a single entity and more of a network. It aims to create autonomous economic players called Terraformers, who we might analogize to miners or stakers in the usual sense.
These players will be responsible for buying and selling LUNA on open exchanges to maintain the peg. Terraformers will be incentivized through their profit-making opportunities and the functioning of a rewards system built into the protocol.
What Is Terra?
Terraformers launch or take over the network through a pooling mechanism. To create a Terra token and begin operating as a Terraform, one must accumulate a minimum amount of UST from other stablecoins within the network (in exchange for their U.S. dollar backing). Once one has accumulated enough UST, that person can become a Terraformer.
A Terraform will initially launch its Terra token as an ERC20 based on the Ethereum blockchain. The protocol utilizes a smart contract backed by real-world assets, which means it has the same security and transparency mechanisms that other stablecoins use. Once launched, a Terraform can control access to the protocol by controlling the amount of UST in its possession.
The Terraform will launch their token onto the network, allowing anyone to purchase it. The Terraformer will then be able to sell LUNA back and forth on exchanges, with most of the time being spent at a point close to 1:1 with the U.S. dollar.
This helps keep it pegged; as long as there is enough volume of LUNA being sold on exchanges, there will always be enough buyers to meet an equivalent volume of sellers and keep the price at or very close to that of a dollar.
A blockchain serves as the foundation for the payment system known as Terra, which also exists on the blockchain. Terraform Labs, which is situated in South Korea and was established in 2018 by Do Kwon and Daniel Shin, is the company that was responsible for its development. Do Kwon has worked in the past for both Microsoft and Apple.
He is also the founder of the startup company Anafi, which provides solutions for decentralized mesh network networking. In addition to being a co-founder of the Korean e-commerce company TMON, better known as Ticket Monster, Shin is the current founder and CEO of the Asian payment technology company Chai, a partner of Terra.
How does Terra work?
The protocol currently stands at about 80% of its launch target. (Terraform Labs has stated that it hopes to have its protocol up and running by the end of Q4 2018.)
To achieve its goal of controlling the token’s value, an initial purchase is required from an individual Terraform. In exchange, one receives UST tokens representing full rights to participate in the ecosystem.
In other words, one must purchase UST to acquire LUNA. You can now purchase and sell LUNA on the EtherDelta decentralized exchange. This is used to determine any adjustments that need to be made to the peg value of Terra.
If the total amount of LUNA in circulation is too high, it will be sold, and the value of UST will need to decrease accordingly. If this happens, a new Terraform can begin operations by purchasing UST in exchange for its LUNA token. The token’s value would go up, and the protocol would continue to operate.
So Terraformers will have to sell off some of their LUNA tokens to ensure that they are likely to have enough dollars at hand when they need them. This will decrease the number of LUNA tokens in the Terraforming network, reducing the amount of instability.
Terraformers will also be able to create new tokens available for purchase and sale by other users on the Terraform blockchain. One of the aims of this SaaS ecosystem is to use it to provide businesses with access to blockchain technology in a way that is fully regulated and transparent.
Users are incentivized to keep the Terra price stable because the market module allows them to trade $1 worth of Luna for 1 TerraUSD (UST) and vice versa. When 1 UST sells at USD 1.005 (i.e., above the $1 peg), users can exchange $1 of Luna for 1 UST via the market swap functionality of Terra Station, Terra’s native platform for wallet, swap, governance, and staking.
The exchange will involve the destruction of 1 Luna and the creation of 1 UST. Users can keep the USD 0.005 difference by selling the 1 UST they receive via the swap at the current market price of 1 UST, which is USD 1.005. The UST price is driven down to the $1 peg due to the growing UST pool caused by many users’ arbitrage behavior.
If, on the other hand, 1 UST is selling for USD 0.995 (just below the $1 peg), then customers can purchase 1 UST for USD 0.995, utilize the market swap tool on Terra Station to exchange 1 UST for $1 of Luna, and so on.
By swapping, the user can convert one UST into one Luna for one Luna and five cents in more U.S. dollars. The UST pool will continue to shrink due to this arbitrage activity, pushing the UST price higher until it reaches the $1 peg.
The future of Terra
The stable currency The main component of Terra is UST, which is used to purchase things in the ecosystem. For example, you can purchase LUNA tokens with $1 worth of UST or one Luna token (LunaST). The value of each token will fluctuate based on supply and demand.
Unlike other stablecoins, Terra is based on a real-world asset – the value of gold – and its price will therefore be influenced by both the real-world supply and demand for gold. The company hopes this will eventually lead to a stable global currency – TerraUSD.
Terraform Labs explained: “By pegging our token to the value of gold, we can create a backing for monetary tokens on the blockchain. Businesses can use this stable currency for their services and operations.”
Moreover, Terra plans on adding more assets as collateral to allow users to utilize any asset they desire as collateral. Any debate on Terra’s protocol’s long-term viability must involve its stablecoins.
Will centralized U.S. dollar stablecoins (perhaps as a central bank’s digital currency) become so entrenched in the U.S. financial system that decentralized alternatives lose favor?
On the other hand, would decentralized stablecoins eventually shift from pegged to the U.S. dollar to backed by liquidity owned by the protocol itself? Alternatively, arbitrageurs may become weary of LUNA, causing a price drop across all stablecoins operating inside its protocols and ultimately dooming them to the same graveyard as Basis and Empty Set Dollar.
What is an algorithmic stablecoin?
An algorithmic stablecoin is a digital token that is issued in a trustless fashion, managed by algorithms rather than humans. According to the White Paper, an algorithmic stablecoin “is created by complex rules implemented into smart contracts on its blockchain. As opposed to pegged cryptocurrencies, this token is independent of any central authority and only responds to the market forces.”
The creator or creator of the algorithmic stablecoin has complete control over its emission parameters, which are implemented into smart contracts on the blockchain.
Algorithmic stablecoins are a special class of crypto assets that combine the features of a stablecoin with those of another cryptocurrency. For this reason, the algorithm (or smart contract) controls how they interact.
On the one hand, algorithmic stablecoins could be manipulated by an entity that controls the smart contract. On the other hand, algorithmic stablecoins could interact with other cryptocurrencies in a more decentralized manner than “pegged” cryptocurrencies.
Instead of being backed by physical assets, they are backed by the algorithm. Algorithmic stablecoins can also interact with other types of crypto assets. If a cryptocurrency is backed by gold and silver, then an algorithmic stablecoin could also be backed by equities or bonds.
The following attributes of algorithmic stablecoins are common to all these variants:
Algorithmic stablecoins are issued and maintained by smart contracts on the blockchain. Algorithmic stablecoins can be mined using an algorithm that rewards users who continually create new algorithmic stablecoins. (These algorithmic stablecoins are often referred to as “mintable” algorithmic stablecoins. ) Algorithmic stablecoins can be freely traded, like any other cryptocurrency.
The technical process for creating algorithmic stablecoins is more complex than for creating stable cryptocurrencies.
The smart contract must create and maintain a currency peg on some asset, such as a fiat currency (government-issued currency) or another cryptocurrency. In doing so, it can monitor supply and demand in real-time. This enables the smart contract to adjust the money supply, which helps maintain the currency’s peg.
Conclusion:
We can say that algorithmic stablecoins are necessary for a digitized global monetary system. However, a lot of mathematical and conceptual development is needed in this field to prevent market manipulation by a single entity.
It’s hard to predict what will happen next, but if we look at the crypto market itself, that was hit by much negative news, speculations, etc. But still, the crypto market is growing steadily, which shows investors’ confidence in these technologies. According to some estimates, more than $ 1 trillion will be invested in blockchain technology by 2025.
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