Algorithmic stablecoins work differently from centralized ones in which the equivalent fiat money is held in reserve (like USDT or USDC).
In algorithmic ones, there are automatic mechanisms that maintain the price using arbitrageurs and a second token. In this case, Terra uses LUNA, the network token, to stabilize their stablecoins.
Terra’s biggest tools:
- CHAI is a payments gateway that uses UST to settle and offers lower fees than traditional gateways. Users who use UST to pay receive some extra incentives. It has gained significant traction in South Korea, with more than 2 million users (5% of the population).
- MIRROR allows decentralized investment in traditional assets, like stocks. Their biggest user base is in Thailand, where buying foreign stocks is extremely difficult.
- ANCHOR is their savings and borrowing platform. It offers savers a fixed 20% rate per year. They can pay so much because they do over-collateralized lending (with UST, but they plan to add others) and then stake the collateral on major PoS networks. They have deposits of more than $350 mn, $400 in collateral, and loans of $125 mn.
The Terra ecosystem focuses on utility and ease of use.
All the pieces work together, thanks to LUNA. The system is designed so the price of LUNA increases if the demand for UST grows, which will happen if their tools are successful.
Also, since the tools are complementary, they push each other forward because there are advantages for users when they use all of them.