TerraUSD (UST): Algorithmic Stablecoin and Dual-Token Model

1. What Is TerraUSD (UST)?

TerraUSD (UST) is an algorithmic stablecoin pegged to the US dollar. It maintains this peg through a mint/burn system linked with the LUNA token:

 • To create (“mint”) 1 UST, users must burn LUNA worth $1.

 • Conversely, burning 1 UST allows minting LUNA worth $1 

This setup allows UST’s supply to scale dynamically, supporting DeFi applications without traditional collateral constraints .

2. Why Choose UST Over Other Stablecoins?

Scalability: Unlike DAI and other over‑collateralized stablecoins, UST’s synthetic mint/burn model avoids supply imbalances during demand spikes .

Ecosystem Support: UST isn’t Terra’s first stablecoin—TerraKRW (pegged to KRW) has been widely adopted in Korea, notably in payment apps like Chai, achieving >2M active users and ~$1.2B volumes in under 16 months .

3. Terra’s Dual-Token Mechanism

Terra’s system features two tokens:

 • UST: the stablecoin.

 • LUNA: the reserve/governance token.

When UST trades above $1, users can burn LUNA to mint UST (reducing LUNA supply, expanding UST). When UST trades below $1, users can burn UST to mint LUNA (reducing UST, expanding LUNA) 

These dynamics maintain the peg by converting price deviations into token supply changes.

4. Advantages and Risks

Advantages

 • Efficient price stabilization through market arbitrage.

 • On‑chain scalability, removed from limitations of over‑collateral models.

Risks

 • High market volatility can strain the peg if LUNA loses value.

 • The model relies on users actively engaging in arbitrage (mint/burn).

5. Ecosystem Integration

UST is integral to multiple dApps in Terra’s ecosystem:

 • Used in TerraKRW, enabling fast and low-fee transactions across Asia 

 • Widely used in DeFi platforms like Anchor, TerraSwap, and Mirror for payments, liquidity, and lending