By Asian0xV — February 19th, 2022
Welcome new Lunatics!
This article is a beginner introduction to the Terra ecosystem. If you are looking to learn more about the Terra ecosystem, this is the article for you!
Disclaimer: None of this content is financial advice and I am not advising you to buy or sell Terra. I am simply helping educate beginners to how the Terra protocol works and how they aim to bring decentralized stablecoins for all. I encourage you to do more of your own research with the resources I provide at the end of the article to further understand the project.
Before I dive into what Terra aims to solve, you must understand what stablecoins are and what the issue is with current popular stablecoins.
What is a Stablecoin?
A traditional stablecoin like USDC (USD coin) or USDT (Tether) is a digital currency that is pegged to a “stable” reserve asset like the U.S. dollar or gold. Stablecoins are designed to reduce volatility relative to cryptocurrencies like Bitcoin by attempting to maintain the constant value to the underlying asset.
What is the problem with Stablecoins like USDC or USDT?
- Despite claiming to be backed 1:1 by USD or another asset, further research has found that these stablecoins are not backed 1:1 by cash.
- Tether had to pay 41 million dollars to the US Commodity Futures Trading Commission (CFTC) because they were misleading investors who were using it to maintain value but in reality, they did not have enough cash reserves to be redeemable 1:1 for USD. (https://www.theverge.com/2021/10/15/22728253/tether-41-million-misleading-statements-fiat-currency-bitfinex-cftc)
- Users who use USDC, USDT, and other traditional stablecoins are losing value when they swap their stablecoins for crypto because the stablecoins is unable to hold its 1:1 “peg” resulting in unfavorable trades.
- In addition to losing value, users with their capital in stablecoins may panic and convert their capital into crypto or cash especially during large periods of market volatility. A situation can occur where stablecoin providers are unable to provide a 1:1 ratio of stablecoin to USD.
Now that you understand what stablecoins are and some current issues with stablecoins, lets dive into how Terra aims to solve this issue.
What is Terra?
Terra was founded by South Korean entrepreneurs Do Kwon and Daniel Shin in 2018. The protocol is a proof of stake blockchain protocol based upon Cosmos-SDK. It aims to deploy a suite of algorithmic decentralized stablecoins in order to create a thriving ecosystem that brings DeFi to everyone worldwide.
- Terra’s technology allows for up to 10,000 transactions per second (TPS) and a transaction time of 2 seconds. In contrast, Ethereum processes 15–30 transactions with a transaction time of over 1 minute depending upon congestion of the network. Due to its high TPS, network gas fees are commonly paid in UST or LUNA and are small. (usually about 0.30$ in UST)
- Terra utilizes a dual token system (UST/LUNA) that work together to maintain and accrue value through its tokenomics.
What is a Algorithmic (Algo) Stablecoin?
An algorithmic stablecoin is designed to achieve better price stability than traditional stablecoins by balancing the circulating supply of an asset through being pegged to a specific reserve asset. Achieving a sustainable and stable algorithmic stablecoin is the holy grail of crypto to help maintain value in the volatile crypto market.
What is LUNA/UST?
- TerraUSD (UST) is the main algorithmic stablecoin backed by Luna which is pegged 1:1 to the USD.
- LUNA is the governance token of the Terra blockchain that can also be used to pay network fees, and used to issue stablecoins. LUNA tokens assists UST to maintain its 1:1 peg through a process sometimes referred to as “seigniorage”. This is a simple mint & burn mechanism between UST and LUNA.
- Within the Terra ecosystem, each stablecoin has a pool of LUNA backing its value. You can convert LUNA into any stablecoin currency and arbitrageur are incentivized to close any price gaps to keep the peg at 1
- Here is a great 2 minute video from Terra explaining this minting and burning process:
What are some of the risks with Algo Stablecoins?
- A stablecoin has “depegged” when its 1:1 peg has strayed far away for a extended period. This is one of the largest risks of the stability of Algo stablecoins. This means that UST could increase to over 1$ or under 1$ for a constant period.
- UST has depegged temporarily during periods of large market volatility as seen in the below chart. This temporary 1:1 depegging is acceptable, although undesirable and as long as the peg can correct itself, this is not an issue.
- Another potential large risk is what is called a “bank run”. If users have lost confidence in a stablecoin, they may run to cash out all their stablecoins at the same time. In a true bank run, the incentives built into the protocol to defend the peg will actually contribute to the “death spiral” of the peg of UST. This would likely look like a major attack which would break the network and would result in the destruction of the UST peg.
- The most significant depegging event for UST was on May 19 through May 23 as seen in the above chart at nearly 0.96$ USD. The entire crypto market saw large market volatility resulting in a down spiral of LUNA/UST as well as the rate of Anchor Protocol borrowers that help support the UST peg. Due to the large market volatility, cascading liquidations also forced more users to have their positions liquidated adding more volatility to UST. Despite this temporary significant depegging, UST’s peg rebounded to 1$ shortly after.
- UST’s adoption has been increasingly at a exponential rate! Currently marketcap is at roughly 12 million.
Total Value Locked (TVL):
- TVL in Terra has exploded to 15.54 billion and is currently the second largest protocol by TVL. Note that Terra was able to achieve this with only 18 protocols currently live on their ecosystem.
Decentralized Applications (dApps):
- Over 200+ dApps are building on top of the Terra ecosystem in 2022 and this number is rapidly increasing with increasing developer activity for Terra.
Columbus 5 upgrade:
- COL-5 was one of the largest protocol upgrades to happen for the Terra ecosystem as it enabled several changes that increase value accrual and interoperability.
- Enabled Inter-Blockchain Communication protocol (IBC) within the Cosmos ecosystem. The backbone of the Cosmos ecosystem, IBC handles transport across different sovereign blockchains. This connection-oriented protocol provides reliable, ordered communication between blockchains. Protocols can now have more data exchange through smart contracts and also token interactions easily.
- Significant deflationary tokenomics implemented for UST/LUNA. By closely tethering LUNA demand to UST demand through seniorage, LUNA’s value capture essentially grow as UST demand grows.
- Because 100% of LUNA is burned in Columbus-5, 1$ billion worth of Luna was burned to help bootstrap Ozone. Ozone is a completely automated, transparent, and impartial claims process to protect liquidity providers and stakers against smart contract risk, hacks, and attacks.
Full Columbus 5 features: https://medium.com/terra-money/columbus-5-launches-welcome-to-the-future-of-terra-8a9ebfa570c5
- One of the largest integrations that will happen this year is the Thorchain and Terra integration bringing LUNA and UST to Thorchain. Lunatics from Terra and Thorchads from Thorchain have supported each other for as long as I have been in the community. Building the decentralized future together.
- Decentralized stablecoins from Terra meets native, permissionless, decentralized, cross chain swaps and liquidity from Thorchain. Synthetics on Thorchain will be exportable to the Terra ecosystem through IBC and yield bearing saving accounts just like Anchor will be available at a later time.
More on Thorchain Synthetics/Thorfiance here from Brokkr: https://brokkrfinance.medium.com/the-essential-guide-to-thorchain-synthetics-d5fd3437b905
The most important aspects of this integration is:
With this integration completed, you would be able to swap from UST/LUNA to native Bitcoin and other native assets in 1 signed transaction through Terra Station and other wallets!
The insanity starts when you consider the tokenomics together… For every $1M of $UST in THORChain, that’s essentially $1M of new $UST needed. So that’s $1M of $LUNA burned to mint that $UST. And for every $1M of $UST in THORChain, there will have to be $3M of $RUNE. So every $1 of $UST also increases $RUNE market cap by $3 (minimum, before any speculative premium) — Chad THOReau
- LFG Guard is a initiative started by Terraform Labs on Jan 19th, 2022 to push major expansion and growth of Terra’s ecosystem. The primary focus of LFG will be building reserves and safeguarding the UST (TerraUSD, Terra’s stablecoin) peg during volatile market conditions. The second focus will be allocating funds to the Terra ecosystem development. The LUNA Foundation Guard has already secured an initial investment of 50 million LUNA tokens.
- Source: https://lfg.org/
Important dApps on Terra:
- Anchor is the the core of Terra’s ecosystem. It is a lending and borrowing platform that gives out a ~20% stable yield on UST stablecoin deposits by over-collateralizing liquid staking positions in bLUNA and bETH. Many dApps like Pylon, Nexus, Orion, Loterra and even Mirror are built to use the stable yields of Anchor to create extra wealth and support the adoption of UST.
- Anchor accounts for over 50% of the TVL of Terra and has become the defacto place to park your UST stablecoins to earn passive rewards.
- Chai is Terra’s mobile payments dApp that allows consumers to pay for items online by simply adding their bank account. Chai went live on TMON, one of Korea’s largest eCommerce companies with 10 million users and $3.5 billion in volume, shortly after the launch of Terra’s mainnet.
- CHAI has been extremely well-received by the community. In just three months following its launch, it has managed to garner over 430,000 users and outperformed the more established KakaoPay in both the Apple App Store and the Google Play Store rankings.
- Mirror allows exposure to synthetic assets (mAssets) like Amazon, Google and Tesla stocks as well as other synthetic crypto assets. Liquidity Pools of these mAssets are included, and both short and long farms are available.
- Terra is aiming to achieve the holy grail of crypto by delivering its suite of algorithmic stablecoins to everyone globally. With the minting and burning mechanisms of UST/LUNA, this will help ensure the 1:1 peg to the USD. The Terra ecosystem is a decentralized and fast 10k TPS blockchain that is rapidly expanding its UST adoption which drives more value accrual for LUNA holders. Users can earn 19.5% APY on their UST stablecoins easily through Anchor and over 200 dApps are building on Terra in 2022.
- Twitter: https://twitter.com/altcoinasian
- Join Terra’s University if you are looking to learn more about Terra and its ecosystem projects. We have created beginner friendly content about how to use Anchor, Mirror, and other dApps on the Terra protocol. Please join the Discord and we would be happy to assist with answering any of your questions: https://discord.com/invite/BDuSdYBxVj
- Terra’s Website: https://www.terra.money/
- Terra Docs: https://docs.terra.money/docs/learn/protocol.html
- How does Terra Work?: https://www.youtube.com/watch?v=KqpGMoYZMhY&feature=youtu.be