Terra Money is Taking Over the World
Accelerated product development and a focus on real-world crypto adoption are paving the way for the success of the Terra financial ecosystem.
A lot of cryptocurrencies are promising big things, but few are actually infiltrating the current financial system. Terra has made it their mission to make crypto adoption mainstream in way that doesn’t require intense knowledge of blockchain technology and the DeFi ecosystem to benefit from their advancement. And after only a few years of creating and developing, it looks as though this goal is not too far from being realized. It is important to give those who are unfamiliar with Terra a simple overview of the current progress of their ecosystem and things to look forward to from the Terra team and community.
So what exactly does Terra do? For starters, they’re a creator of algorithmic stablecoins pegged to the value of government fiat currencies, such as USD, EUR, GBP, and KRW. While Bitcoin continues to see price volatility in the short term, as well as 200% risk adjusted annual appreciation, this could pose a threat towards its adoption as a medium of exchange as people are less likely to use it to transact. Therefore, stablecoins provide a great crypto alternative, as users can benefit from the stability and network effects of fiat currencies while providing lightning quick settlement times and cryptographic ownership. But what truly sets Terra’s stablecoins apart is the development of a financial ecosystem that facilitates their widespread use and demand.
At the heart of Terra’s ecosystem is the LUNA token. LUNA is meant to represent the value and demand of Terra’s stablecoins. Simply put, it does this by providing the mechanism for which new stablecoins are minted. For every $1 in UST to be minted, $1 in LUNA is burned from the circulating supply. Therefore, the higher the demand for Terra’s stablecoins, the lower the supply of LUNA. With a shrinking supply and heightened demand, LUNA’s price will be automatically driven higher. As Terra’s co-founder Do Kwon himself puts it
A bet on the moon is very simple: — it goes up in value (inc. scarcity) the more Terra money is used — it goes down in value (inc. dilution) the less Terra money is used. The moon’s fate in the long run is tied to how widely the money gets used and transacted.
So, by buying LUNA you are betting on the growth of Terra as a whole.
Since Terra is a Proof of Stake (PoS) blockchain, you can stake LUNA for a return of around 12% APY, which is usually based on the transaction fees gathered by the network, and is given out in both LUNA and the stablecoins used in transactions. In addition to this return, you will also be eligible for airdrops of tokens for projects built on Terra’s blockchain (such as ANC and MIR).
In Q1 of 2021, LUNA saw explosive growth, appreciating 2746% and reaching an all-time high of $22.33 on March 21st. Since then, LUNA has been trading sideways given immense growth in such a small period of time. During the writing of this article, LUNA is trading at $13.50 with market capitalization of around $5 billion, which puts it around the top 30th spot of all cryptocurrencies. Given Terra’s potential for future growth, the burning mechanism of LUNA, and its reversion from an all-time high, its hard to argue the token doesn’t look undervalued at this price point.
Chai, Anchor, and Mirror
As stated earlier, Terra’s success has come due to their ability to create demand and provide use cases for their stablecoins.
In 2019, Terra launched their mainnet and introduced their first stablecoin, KRT, pegged to the Korean Won. KRT was immediately integrated into the Chai Payment app, which was created by Terra co-founder Daniel Shin as a way for people to pay for things online using cryptocurrencies, providing convenience for customers and fast settlement times for merchants. Now, over 2 million people use the Chai payment app, and they are accepted by many of the largest online merchants in South Korea.
While Chai kickstarted the commercial use of Terra’s stablecoins, new protocols were beginning development to further Terra’s use case. In September 2020, they created the stablecoin UST tied to the U.S dollar, which was followed in December by the launching of Mirror Protocol. Mirror is a synthetics protocol which creates tokens tied to prices of real-world assets. This has so far been used mostly for the prices of U.S. equities, such as Tesla and Amazon stock, but is also tracking the prices of gold and silver as well as other cryptocurrencies. This provides a gateway for people to invest in assets they would otherwise not have the access to invest in, allows people to earn yield on their assets through liquidity pools, and will soon give people the ability to create new ways to interact with these assets that you couldn’t imagine doing before.
While Mirror immediately spiked the demand for UST, soon another protocol was introduced and launched in March 2021: Anchor Protocol. Anchor is designed as a savings protocol that gives a fixed yield to those that deposit UST on the platform. As of right now, Anchor promises a fixed rate of 20% APY. In addition, you can use Anchor as a way to borrow UST using bLUNA (bonded LUNA) as collateral. Although 20% returns may sound too good to be true, it does have a sound mechanism to achieve this peg. Anchor is able to give such a large APY by depositing all collateral used into earning staking rewards through the PoS system. Using ANC tokens as incentive, they are able to facilitate borrowing at a maximum LTV of 50%, which essentially means the amount borrowed (and in this case the amount deposited) will equal half as much as the amount collateralized. Since LUNA’s current rewards are 12%, with double the amount of collateral they are able to create 24% returns, of which 20% go to the depositor and 4% are put back into the system. For a more detailed explanation, check out the Anchor white paper. With a fixed APY of 20%, Anchor is trying to become the new standard for stablecoin interest, and looks to be incorporated into major FinTech apps who are looking to compete for users. As Do Kwon said in an interview with KryptoSeoul,
In order for Anchor to get really widely adopted, you just need this to get integrated with one or two very large storied FinTech institutions […] The reason for this is that if Venmo integrates with Anchor and offers 20% interest on user deposits, it will be commercial suicide for Square Cash App not to do the same, […] because no matter what features they‘ll create there’s no way they can compete with 20% interest.
Soon you will able to use other PoS assets as collateral for borrowing, such as Polkadot, Solana, and Ethereum. Do Kwon also mentioned in a recent interview with the Defiant, that you will soon be able to use Anchor with any other stablecoin, such as USDC or USDT, to deposit and earn interest on the platform. In the back end, Anchor will be able to immediately convert these stablecoins into UST, which both further increases the demand for the platform as well as burns more LUNA in the process.
Based on these platforms alone, the demand for UST has grown over 800% in 2021, with over $1.8 currently minted. This makes UST the fifth largest stablecoin, quickly catching up to DAI at $3.4 billion.
UST and Anchor are battle tested
On April 18, 2021 (UTC), we saw a “flash crash” in the crypto markets, where many of the top cryptocurrencies dropped by over 20% in the span of a few hours. With such massive volatility, we saw many “stable” crypto assets fall away their peg very quickly, but with the case of UST and Anchor, they remained rock solid.
Also, while many other algorithmic stablecoins have completely lost their peg, UST continues to stand the test of time.
So, while there is often a concern with stable assets to remain fixed, the algorithms that run Terra’s ecosystem have proven to be secure, and this is attractive for anybody thinking about putting money into and utilizing Terra’s ecosystem.
A bright future ahead
Although the current Terra ecosystem has already caused a massive rise in adoption, there is no shortage of news and projects coming down the pipeline. First, there has been a recent rise of development on the Terra blockchain.
Many dApps have been confirmed to be developing and will soon sit alongside Anchor and Mirror. Here is the current, but not exhaustive, list:
Spar Protocol: A decentralized asset management system that allows users to create and invest in cryptocurrency funds.
Nebula Protocol: Algorithmically created ETF’s.
Pylon Protocol: Pooled product fundraising for projects looking to build on Terra.
Mars Protocol: Cross-chain money market.
Alice Finance: A fiat gateway and UI for Americans to interact with Terra’s ecosystem.
Ozone Protocol: Insurance for users on Terra
Saturn Money: A fiat gateway and UI for those from the EU and UK.
Kash DeFi: Mobile banking for emerging markets.
Harpoon Protocol: Liquidation market for Anchor’s lending protocol
Loop Finance: Cross-chain AMM and DEX
Many of these platforms will continue to increase the demand for Terra’s stablecoins. Most notably, Alice and Saturn will provide easy access for people to interact with Terra’s ecosystem from their mobile device. With a hackathon event coming May 5–7, many more ideas will certainly be on their way towards development as well.
In addition to this, there seems to be strong hinting towards the signing of an MoU with the city of Busan, the second largest city in South Korea. Here are some pieces that have been put together by the Terra community:
While this has not been officially confirmed, there is a strong indication that this partnership has been signed and will be announced soon. Based on the community’s understanding of the infrastructure, it looks as though Terra will be used to replace or coincide their current Dongbaekjeon money system, which uses an IC-chip credit card that gives cash back for those that spend at local businesses. The amount of cash back awarded was 10% but needed to be reduced to 6% in April. Terra is attractive because allows this program to be efficient and sustainable for the long term, and the banks issuing these cards may be able to use the benefits of the current Terra ecosystem, such as the 20% APY on Anchor. Last year, around $2 billion was used in the Dongbaekjeon system, and since the system has been only developed recently we can certainly expect this number to increase in the future. If that much UST (or KRT) is needed to fund such a system, that’s a lot of LUNA you can expect to be burnt. Although this is just speculation for now, it’s clear that Terra has plenty of use cases over the current financial system that make it attractive to companies and governments to implement.
There’s a lot to be excited about when it comes to Terra. An insane amount of development is coming around the corner, which will give rise to more and more demand of their services. As more of their stablecoins are issued, the supply of LUNA will continue to shrink, making the token a valuable investment in the long-term growth of the ecosystem. If the partnership with the city of Busan is confirmed, this could mark the beginning of wide-spread trust in Terra and could pave the way for other governments and large companies to follow suit. Mainstream cryptocurrency adoption is their main goal, and it looks as though they are on their way to succeeding.
One thing is for sure, don’t bet against the moon.