Terra USD or UST, is a stablecoin that comes to life on the TERRA blockchain. This stablecoin works algorithmically in much the same way as MakerDAO’s DAI does. Nevertheless, Terra USD does not need to collateralize cryptocurrencies to create a new UST, and instead, just burn the equivalent amount in dollars of the LUNA token for the system to generate; its equivalent in UST and can be used. All this process is carried out automatically thanks to the smart contracts that control this system.
UST generation example
To see this in a simpler way, let’s continue with this example:
Suppose the system must create 1000 UST to maintain the stability of the token price. In that case, the system looks for the price of the LUNA token and observes that it is $ 20 per token. At that point, the system prepares a LUNA token burn of a total of 500 LUNA, in order for the burn to enable the system to generate 1000 UST. Only when the LUNA token burn is performed, the 1000 UST is obtained, and the balance of the system is maintained.
The same happens if you need to create LUNA tokens and burn UST, burning the equivalent of the latter, to generate a new LUNA and maintain stability.