Terra was created as a response to one of the most centralized corners of the crypto economy–stablecoins. Through its mint-and-burn mechanism, Terra automatically adjusts the supply of its native token, LUNA, to maintain a stable peg to USD for its stablecoin, UST. 

This algorithmic, automated stability mechanism means that the stablecoins supported by Terra are truly decentralized and not controlled by any third-party. This is a stark contrast to USDC and USDT, which are backed by and may be redeemed for (allegedly) corresponding amounts of USD held in a centrally-controlled bank account. 

In addition to UST, Terra supports a host of other stablecoins, including TerraSDR (or “SDT”), based on the International Monetary Fund’s Special Drawing Rights, which relate to a shared pool of fiat currencies managed by the IMF. SDT is described in the Terra White Paper as “the flagship currency of this family, given that it exhibits the lowest volatility against any one fiat currency (Kereiakes, 2018).”

The Bretton Woods system refers to an agreement reached between 44 allied nations towards the end of WWII, which consolidated all major fiat currencies into a “basket of currencies” managed by the IMF and originally backed by the gold standard. 

This system was based on the idea that by pooling monetary resources and limiting exchange rates between countries, the economic stability of a unified world economy could be preserved and developed after the war was over without undermining the independence of member countries. 

Once the United States abolished the gold standard in 1971, other countries followed suit until 1973, when SDRs ceased to be based on gold and the original Bretton Woods system ended. The result was a special drawing rights system and floating rates supplied by the IMF, which we still use today.

The term “Special Drawing Rights” (or “SDR”) refers to foreign exchange reserve assets maintained by the IMF. When the original Bretton Woods system was in place, these were originally created to remedy a shortfall of preferred assets, such as gold and USD.

After the collapse of the fixed-rate system, the SDR was modified to represent a unit of account with the IMF’s fiat-based system, rather than 0.888671 grams of fine gold.

Now, the value of a SDR is based on a basket of key international currencies reviewed by IMF every five years.[3] The weights assigned to each currency in the XDR basket are adjusted to take into account their current prominence in terms of international trade and national foreign exchange reserves.[3] In the review conducted in November 2015, the IMF decided to add the Renminbi (Chinese yuan) to the basket, effective 1 October 2016.[9] Since that date, the XDR basket has consisted of the following five currencies: U.S. dollar 41.73%, euro 30.93%, renminbi (Chinese yuan) 10.92%, Japanese yen 8.33%, British pound sterling 8.09%.[10]

The IMF is a centralized monetary institution that allows members to benefit from decentralized traits. One of these benefits is the ability to request collateral based on a pool that is derived from the monetary stability of multiple economic areas. 

Another benefit is the transparency of assets by which SDRs are based, which has led to 14 countries basing their currencies on the SDR. However, the main pitfall of this system is that only the IMF can allocate this collateral, and they can only be allocated to countries themselves, not private parties. 

In essence, the IMF in its discretion uses these assets to bootstrap the economic improvement of developing countries (or those recovering from crises) using the pooled monetary stability of countries that contribute to their currency reserves. There have also been concerns that these practices are predatory and lead to increased corruption among countries receiving allocations. 

Terra’s IMF stablecoin, TerraSDR (or “SDT”), is a synthetic version of SDRs, and maintains its peg to them in the same way UST maintains its peg to USD through minting or burning LUNA as the price increases or decreases. 

SDT also realizes the full benefits of decentralization, and may arguably be considered an even more secure stablecoin than most current offerings, which are based on the monetary fate of a single country’s currency. This is presumably why, Terra states, “the Terra protocol uses TerraSDR or SDT as its base currency for calculations and to set standards.”

Not only is SDT used as the base currency for protocol calculations, but according to Terra’s treasury documentation, SDT was intended as the primary currency for a now-unused tax mechanism meant to incentivize miners toward stable, long-term network growth. 

In this iteration, miners were rewarded with seigniorage rewards, with seigniorage being defined as the value of a coin minus the cost to produce it. While the Treasury module is still active, it has been effectively rendered toothless by the governance proposals that now burn all seigniorage rewards and have changed the stability fee tax rate to zero. This results in LUNA being deflationary in nature, and provides the backbone for the current price peg system of Terra.

SDT is the base pool for Terra’s host of stablecoins, but a market has not developed for it as a stablecoin in its own right due to the success of these other fiat-based stablecoins. However, its continued presence as a functional Treasury module asset should give comfort to those betting on the long-term stability of Terra. 

There is a lot of uncertainty in the world, particularly given rising inflation and increasing border conflicts, and the Terra community has done well to preserve a functional “Plan B” in its protocol should an externality affect its peg. 

Terra itself considers SDT “the base Terra stablecoin.” This means that even if the arbitrage/market maker function that Terra currently uses fails or if the market is otherwise decoupled due to mining activities, the network can easily implement the Treasury module and associated functions if needed since the Terra protocol utilizes SDT at its most basic level. At a minimum, SDT can and should be seen as one of the most well-thought-out decentralized stablecoins ever created. 

As the base stablecoin on Terra, SDT is the currency in which transaction fees, miner rewards, and stimulus grants are denominated. It is also the fundamental base of all other stablecoins supported by Terra, including UST. 

Currently any of these stablecoins, including UST and SDT, can be swapped for LUNA (Terra’s governance/stability mechanism token) for staking on the network. This can easily be done by delegating LUNA to a validator, such as Figment. Rewards are earned in stablecoins at the present rate of between 7-8% APY.  

As a staking services provider, Figment has been involved with Terra from its early stages, and currently ranks among the top 10 validators for the entire network. We believe not only in providing top-of-the-line staking services, but also that conversations like these are essential to the ongoing health and development of networks like Terra. 

Given the boldness that Terra has used to establish itself as a dominant stablecoin based on decentralized principles, we will continue to take part in the development of this network with high expectations for the future.