For Crypto Enthusiasts: How Does TerraUSD Work?
The creators of TerraUSD came up with another cryptocurrency, Luna. The interaction between the two should keep TerraUSD at $1. The rule is that you can always exchange 1 Luna dollar for 1 TerraUSD.
Let’s say TerraUSD is worth a little more, that is, more than a dollar. At the moment you can exchange 1 Luna dollar for 1 TerraUSD on the platform. It’s tempting because you’re making a profit on this trade: for $1 from Luna, you’re buying something worth a little more than a dollar.
In this process, a new TerraUSD is created and a Luna is lost. Result: Terra’s value decreases with each trade as more Terra circulates.
Trades make money as long as the value of the Terra is above $1, so traders keep making these trades until the value is exactly $1. For example, the value of the stablecoin should remain (almost) constant at one dollar.
If TerraUSD is worth less than a dollar, this mechanism also works the other way around. For 1 TerraUSD you get 1 dollar for Luna. In this trade, a TerraUSD is destroyed, the stock decreases and the value is ideally increased to exactly $1.
Source: RTL
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