While the concept of stablecoins being cryptocurrencies that are pegged to the market value of an external market like the USD, it is fairly straightforward.
However, did you know that not all stablecoins are created the same way?
There are actually two different types of stablecoins:
- Off-chain collateralized stablecoins – An example being Tether ($USDT) which is (we hope) backed by actual USD reserves held in escrow
- Algorithmic stablecoins – Such as the Terra stablecoin ($UST) that use pooled $LUNA tokens, controlled by smart contracts, to maintain the pegged price
Terra USD is a decentralized stablecoin while $USDT, created by Tether Limited, is operated by the centralized authority which claims to have equivalent amount of USD as reserves that act as a collateral. The company has the ability to issue as many $USDT tokens as they want. They also control the details of reserves as well.
How Stability is Achieved
Terra USD is an algorithmic stablecoin. In order to mint a new $UST Token, an equivalent amount of $LUNA, native coin of Terra blockchain, is burned and vice versa. This is how its stability is achieved without the need for collateral.
$USDT simply mirrors the price of USD backed by fiat-collateral, as per Tether Limited. However, there is no way to check the authenticity of their reserves data.
Terra blockchain can perform hundreds of transactions per second. Terra USD ($UST) transactions are usually settled within a few seconds while $USDT transactions can take up to a few minutes during network congestion since it’s built on the Ethereum blockchain.
You can transfer Terra USD ($UST) for a few cents which includes the validator fee (GAS) and taxes which are much cheaper than $USDT and other payment gateways. Due to high GAS fees on Ethereum network, $USDT transactions are expensive.
The Terra Blockchain uses Cosmos technology which is originally designed to build interoperable blockchain applications. Right now Terra USD ($UST) is available on Ethereum and Solana. In future, more blockchains will be added.
$USDT is also available on many other blockchain networks, and way more than Terra USD.
Ethereum is currently facing stability issues. While Ethereum 2.0 is being implemented, it can only scale it up to a limit. Also, it will take a lot of time to happen. Due to fast block times and a limited number of validators, Terra achieves high scalability.
Tether is one of the top 5 cryptocurrencies in terms of market cap. Many people hold it to enter and exit into their trades while avoiding the extreme volatility of the market. It’s one of the earliest stablecoins and hence got adopted all over the world.
While Terra came later, it has advanced rapidly to become the third largest.
RECOMMENDED READING: EXPLAINER: How Algorithmic Stablecoins Like $UST Work
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