UST stablecoin has now dislodged Maker’s DAI to become the 4th largest stablecoin with a market capitalization of over $9.2 billion surpassing DAI’s $9 billion.
UST was introduced in September 2020 as part of Terra, a layer 1 smart contract-enabled network built using the Cosmos software developer kit. Terra, currently the 4th largest layer 1 blockchain also has LUNA governance token as part of its ecosystem.
By surpassing DAI, UST has also become the number 1 ‘decentralized stablecoin,’ that is, one not backed by fiat assets but by cryptocurrencies.
Additionally, UST relies solely on arbitrageurs (arbitrage seekers) to maintain its peg. It does this by automatically contracting the supply of UST when it is below peg and expanding governance token Luna, and vice-versa, when it is above peg.
When UST is below peg, arbitrageurs can mint $1 worth of $Luna by buying and burning UST. They can then sell Luna immediately.
When UST is above peg, they can mint $1 worth of UST by buying and burning $Luna to sell back on the market which is trading at a premium.
With $82 million market cap in January 2021, UST’s continued growth has also been attributed to recent adjustments to its token burn mechanism including the burning of all LUNA used to mint UST since October 2021.
However, with custodial stablecoins USDC and USDT facing constant scrutiny, there is more interest in alternative stablecoin technology – a key factor in UST growth.