How LUNA tokens and UST are mutually dependent?

by | Jul 3, 2022 | Market, Market News, News | 0 comments

The LUNA token

Terra’s native token is called LUNA. IT can be considered an algorithmic stablecoin. It is described as a protocol token. LUNA is the network’s staking and governance asset. Terra is a blockchain developed by the Korean firm Terraform Labs. Well-known sources like Binance have invested in this project. LUNA was launched in 2019 and was one of the most successful decentralized coins.

Its founding team is headed by the Wharton School of Economics graduate, Daniel Shin who is an investor and entrepreneur. He has also founded a fintech company called, HOF.

Terra, the blockchain aims to create stablecoins (stablecoins are cryptocurrency coins whose value is soft pegged to a fiat currency).

UST

Launched in September 2022, another one of the Terra blockchain’s algorithmic stablecoins is UST. Like LUNA, it is also decentralized. It previously gained the reputation of being the most scalable stablecoin.

Its value is soft pegged to the US dollar. It aims to deliver its users benefits such as higher scalability, interest rate accuracy, and inter-chain usage. Its higher scalability offers a scalable solution to Defi. UST is also simple and easy to use. It can be added to your crypto wallet simply by integrating TerraUSD as a payment method.

Its several benefits and unique features make it one of the biggest competitors in the cryptocurrency market. Its minting procedure makes it appropriate to follow the Defi protocols, without hindering its scalability.

How LUNA tokens and UST are mutually dependent?

To understand more about the LUNA crash, we must dive into the relationship between the two tokens. Let’s understand how the LUNA token and UST are mutually dependent.

The Terra blockchain implements a dual token system between LUNA and UST.

The LUNA coins are used for staking and mining stablecoins such as UST on the Terra blockchain. The UST stablecoins can be used together with LUNA or as a standalone. The UST stablecoin is programmed in such a way that when it is minted, an equal quantity of LUNA is burnt.

UST is supposed to keep a 1:1 mint to burn ratio with LUNA, which means that, when a certain amount of UST is minted, an equal amount of LUNA is burnt. This makes UST completely dependent on LUNA. However, this does avoid reliance on over-collateralization or debt. LUNA and UST are essentially tied together. Whenever there is a difference in said ratio, brokers can use this to their advantage by profiting off this difference. They also help UST by preserving its value and not allowing it too deep. This is how the LUNA token and UST are mutually dependent.

To understand this, let’s take an example. Suppose the value of LUNA drops below one dollar, a broker would take this chance to jump in and burn 1 LUNA token to mint 1 dollar worth of UST, and then sell this token to make a profit through it. Similarly, if the demand and popularity of the UST flourishes, more and more LUNA tokens will be burnt to mint the desired amount of UST tokens, decreasing the overall supply of the LUNA tokens.

UST is thus, programmed to control, modulate and maintain the value of the LUNA token. In turn, LUNA behaves as UST’s collateral and is accountable for UST’s stability.

This is the relationship between LUNA tokens and UST. They are both mutually dependent on each other. For this reason, when LUNA crashed, UST’s value was heavily debugged from the US dollar, thus causing a huge loss to its investors. Although Terra(UST) is still predicted to recover, it surely won’t be soon. This defines how the LUNA token and UST are mutually dependent.