Skip to content
Blockchain LabVENTURE STUDIO

whitepaperCredit and stable value2019

Terra Money: Stability and Adoption

Terra. Do Kwon.

Do Kwon's 2019 paper for a family of fiat-pegged tokens stabilised by an arbitrage relationship with a second, volatile token. It is included because it is a canonical design paper that was not in the historic library. It is included as a failure case, not as a model to ship.

Historical design only. TerraUSD broke its peg in May 2022. This page is not an endorsement and not a reconstruction guide.

The problem the paper names

Collateralised stablecoins lock more than a dollar of assets to issue a dollar. Terra's paper proposes to issue a dollar token against a protocol token, and to maintain the peg by letting arbitrageurs mint and burn between the two.

What the design proposes

  • A stable unit and a volatile unit. Minting one burns or stakes the other, under the paper's rules.
  • Demand for the stable unit is supposed to come from payments, described in the paper through a partner network.
  • When the stable unit is below peg, the design relies on contraction: arbitrage that reduces stable supply and expands the volatile supply.

How the mechanism is specified

  • The peg is an arbitrage argument. It assumes someone will trade toward the target while the volatile unit still has a market.
  • Seigniorage, in the paper, funds adoption. That is a fiscal story sitting on top of the peg story.
  • Nothing in the mechanism adds exogenous collateral equal to the stable supply.

What this page does not treat as proven

  • Public record after the paper: the TerraUSD peg failed in May 2022, and the design is widely treated as a failed algorithmic-stablecoin experiment.
  • This page does not recount a blow-by-blow of that collapse and does not recommend any reconstruction of the mechanism.
  • A paper's arbitrage proof is not evidence that a peg will hold when the volatile unit gaps down.

Why a venture studio still reads it

We keep the paper so a venture cannot pitch 'algorithmic stability' as if the primary document were obscure. Read it next to Maker. One design names collateral and a shutdown. This one names an arbitrage against its own token. That difference is the lesson.

This is Blockchain Lab's reading of a public design paper. It is not the paper, not a copy of it, and not an offer of tokens, equity, custody or a partnership. Later network behaviour can diverge from the text. Nothing here is investment, legal or technical advice.