The advent of online banking has undoubtedly revolutionized the global financial system, with relevant multiple payments solutions now ingrained into our day-to-day activities. For a relatively small fee, payments platforms like Visa, PayPal, Stripe etc., facilitate millions of transactions in a seamless and fast manner on a daily basis.
However, with cryptocurrency and blockchain technology fast-changing our financial landscape, we are certainly in for even cheaper, faster and boundless payment systems. TerraUSD – one of the fastest-growing and largest stablecoin – is powering the next-generation blockchain payment network.
In this piece, we discuss some of the primary use-cases of TerraUSD that has helped it gain much popularity within the blockchain economy in a relatively short period.
What is TerraUSD?
To get a grasp of TerraUSD, we first need to understand Terra — the Proof-of-Stake (PoS) blockchain that powers the creation of algorithmic stablecoins. Terra is an open-source and decentralized blockchain protocol developed in 2018.
The protocol aims to harness the inherent benefits of cryptocurrencies through stablecoins, which can be pegged to any fiat currency, to improve the shortcomings of existing payment solutions, consequently spurring the global adoption of cryptocurrencies. The protocol has attained massive plaudits in the crypto space, and at the time of this writing, there are three known successful stablecoins developed using the Terra protocol — one of which is TerraUSD.
TerraUSD (also known as UST) is an algorithmic and decentralized stable token pegged 1:1 to the US dollar price. In simpler terms, the price of the UST token is maintained at the price of the United States dollars utilizing an algorithm based on the simple economic principles of demand and supply. LUNA coin — the native token of the Terra blockchain — fuels the demand and supply of UST, helping to maintain the currency peg to USD.
As with various other dollar-pegged stablecoins, this stability enables users to pay for goods and services using cryptocurrencies without the infamous volatility issues ascribed to digital assets like Bitcoin and Ethereum — the two largest digital currencies by market capitalization.
As we stated earlier, several dollar-pegged stablecoins are available today, most notably USD Tether (USDT), USD Coin (USDC), and DAI. However, we discuss UST’s primary use-cases that have aided its fast-rise ahead of its predecessors.
TerraUSD Use Case: Daily Transactions and Cross-Border Payments
Stable coins remain the answer to the volatility hurdle that has plagued the cryptocurrency market since the inception of Bitcoin in 2009 thus far. While cryptocurrencies have undoubtedly satisfied Satoshi Nakamoto’s (a pseudonymous name used to refer to the creator of Bitcoin) vision to create a peer-to-peer(p2p) digital payment solution — eliminating the need for financial intermediaries and regulators; they are yet to fit into our day-to-day transactions.
Why? Volatility. Cryptocurrencies are largely susceptible to media speculation and market manipulation; hence, they are highly volatile – making them unattractive to businesses and merchants.
However, merchants and businesses can accept payments in UST, which maintains a close value to the US dollars and can then exchange for actual fiat currencies – USD in this case. Although many stablecoins largely maintain a 1-to-1 peg price to the US dollar, the Terra protocol distinguishes itself by offering a discount model that incentivizes consumers and merchants using UST for payments — a display of its commitment to becoming the world’s leading e-commerce stablecoin payment platform.
With native payment solutions like PaywithTerra — an API gateway running on the Terra blockchain that enables merchants to accept UST payments, UST might just be on course to power the next generation of payment networks.
Additionally, given the Terra blockchain protocol facilitates the development of algorithmic stablecoins that can be pegged to any national fiat currencies, holders of UST can easily exchange their tokens for any other stablecoins on the Terra blockchain network. For example, similar to TerraUSD, the protocol hosts TerraKWT — another stablecoin pegged to the Korean Won.
Suppose a business needs to make payment in Korean Won or a similar national currency available within the Terra ecosystem; they can simply swap UST for KWT. Because transaction fees on the Terra network are capped at 1% (average transaction fees are far less), this use-case of UST makes for a far seamless and cheaper cross-border payment solution with an instant settlement compared to existing traditional methods.
TerraUSD Use Case: Yield Generation and Passive Income
This is perhaps one of the most exciting use-cases of UST. Terra network allows platform users and community members to earn passive income on their UST holdings through its native protocol — Anchor. Anchor is a savings protocol hosted on the Terra blockchain that offers yield, powered by block rewards of prominent Proof-of-Stake blockchains.
In simple terms, Anchor offers a savings-account-like product for everyday investors with a fixed 20% interest rate on UST deposits. While the exact mechanism of the Anchor protocol is beyond the scope of this write-up, it has proven a remarkable success in providing a tangible use case for UST as opposed to simply being held in a wallet.
Anchor fosters a money market between lenders looking to earn yields on their holdings and borrowers looking to borrow stablecoins on stakeable assets. To borrow UST, borrowers lock up collateral referred to as bonded assets (bAssets) — a tokenized representation of already staked assets on PoS blockchains.
On the other hand, lenders are issued an equal value of aTerra tokens — a representation of deposited stablecoins, which are can be exchanged to redeem initial deposits alongside accrued interests. This single use-case makes UST and the Terra protocol attractive to the broader audience of traditional investors looking to explore the benefits of the crypto market and decentralized finance (DeFi) platforms — more on DeFi below.
While many DeFi platforms (like Maker and Compound) offer savings staking rewards, Anchor distinguishes itself by providing stable interests on staked assets and guarantees capital preservation through the liquidation of collateralized assets, powered by liquidation contracts and third-party arbitrageurs.
TerraUSD Use Case: DeFi
In late 2021, UST hit an all-time-high market cap of $10 billion. A feat that saw the Terra network surpass Binance Smart Chain (BSC) as the second-largest decentralized blockchain in terms of total value locked (TVL) – a metric used to measure DeFi activities on any blockchain. Today, DeFi solutions offer services ranging from lending, borrowing, trading, savings and many more, and stablecoins play a critical role in the DeFi ecosystem. This means that UST has quickly become the go-to stablecoin in DeFi, which many attribute to the massive success of Anchor.
DeFi is an umbrella term used to describe an emerging sector of the crypto and blockchain industry that aim to provide conventional financial services (such as issue loans, asset trading, investment etc.) through decentralized applications (dApps) built on a blockchain; hence, removing the necessity for any centralized authority (i.e. a central bank, hedge funds etc.). DeFi expands on the censorship-resistance property of blockchains to deliver digital alternatives to bank services.
Hence, seeing that the DeFi scene is in its nascent stages, UST will have more use-cases as more DeFi solutions are being developed. The icing on the cake is that UST offers an interoperable functionality leveraging Terra blockchain’s Dropship bridge — a protocol that fosters the seamless movement of assets between various blockchains. This makes the UST tokens will be universally available within the DeFi ecosystem, irrespective of the blockchain hosting a dAapp.
TerraUSD Moving Forward
TerraUSD was first minted in December 2020. Despite its relatively short existence when compared to its older and larger rival, DAI (which it also recently surpassed to become the leading decentralized stablecoin by market capitalization), Terra has enjoyed tremendous success — mainly owing to native and functioning protocols like Anchor and Mirror — a sister protocol on the Terra blockchain that fosters the creation of synthetic assets and tracks the price of real-world assets.
With the project’s continuous quest to bring all the benefits of cryptos and DeFi, without the volatility issues and price unpredictability, Terra and UST have tremendous potential to spur the global adoption of cryptocurrency usage in our day-to-day transactions.