TerraUSD

TerraUSD (UST) is an algorithmic stablecoin that was originally issued on the Terra blockchain by Terraform Labs. It was designed to maintain a value close to one US dollar through a mint-and-burn mechanism that used the network’s native token, LUNA. The basic idea was that UST could be created by burning LUNA and redeemed for LUNA to restore the peg, thereby linking the supply of UST to demand while enabling on-chain payments and governance within the Terra ecosystem.

History and mechanism

UST operated as part of the Terra protocol alongside LUNA to support an on-chain economy and stable-value transfers. The protocol relied on algorithmic incentives rather than full collateral as a stabilization method, with the intent that market participants would absorb volatility and keep UST near a dollar.

Collapse and fork

In May 2022, UST briefly lost its peg and rapidly depegged, triggering a broad collapse in confidence and a dramatic drop in the price of LUNA. The event caused substantial losses for investors and led to a de facto restructuring of the Terra ecosystem. In the ensuing fork, the original Terra blockchain was split into Terra Classic (LUNA Classic and UST, renamed USTC on the classic chain) and a new Terra chain (“Terra 2.0”) featuring a new LUNA token. The revived chain did not reintroduce the original algorithmic stablecoin model, and UST on the classic chain trades as a depegged asset separate from the new stablecoin arrangements.

Current status

As of the mid-2020s, UST remains associated with Terra Classic as USTC and trades around its depegged value, while the Terra 2.0 network operates with a new LUNA and does not carry the original algorithmic UST model. The Terra episode is frequently cited in discussions of stablecoins and crypto risk management.