Terra 101 - Everything you should know
Definition, stablecoins, ecosystem, and more.
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We talked about Cosmos last week, and how it is an essential player in the enablement of interoperability and multichain reality in the crypto world. We also briefly touched upon some of the key names that are built using Cosmos tools.
One of these names belongs to Terra, whose native coin experienced an impressive rise into the top 10 cryptocurrencies by market cap last year.
In a year during which many Layer 1 blockchains rallied like never before, it is Terra who staggered a 170x return during 2021, more than Ethereum, more than Avalanche, and even more than Solana.
Take a moment to let that sink in.
Now, what made Terra the fastest horse? Well, what makes Terra so special is the entire ecosystem designed and built around providing an actual alternative to the existing financial system, focused on practical use cases.
It is this practicality, combined with the holistic vision of a comprehensive ecosystem, that makes me particularly bullish about Terra.
This is a mouthful, so allow me to explain further.
Let’s be a bit more concrete on what makes Terra so interesting…
The crypto world has made a lot of progress in the last few years, but from a plain money use case perspective, we are falling a bit short.
Without the ability to be the everyday currency, crypto will not become mainstream.
With this in mind, Terra’s team set themselves on the mission of bringing DeFi (decentralized finance) to the masses.
The way this is done, is by building an alternative monetary ecosystem around the key use cases of money, as follows:
A better money: Terra Stablecoins
Spending money: Chai
Saving money: Anchor Protocol
Investing money: Mirror Protocol
And this is what I’ll be sharing with you today, but let me give you a quick intro to the profile background first….
Key facts about Terra
Who is behind Terra:
Terra is a Proof of Stake blockchain founded in January 2018.
The company behind it is called Terraform Labs, a software development company based in South Korea.
Terra is founded by Standford computer scientist and current Terraform Labs CEO Do Kwon, and Wharton business entrepreneur Daniel Shin.
In terms of tokenomics...
LUNA is Terra blockchain’s native coin, currently ranking as the top 9th cryptocurrency by market cap.
LUNA was launched in 2018, and held a series of private sales, raising 33 million.
Besides the main purpose of maintaining the stability of Terra stablecoins, LUNA is also used for staking, governance, and paying transactions fee on the Terra blockchain.
Technology wise…
Terra is a Proof of Stake blockchain built using the Cosmos SDK, adopting the Tendermint consensus mechanism.
This means that it has a maximum of 130 validators, making it a less decentralized network compared to other PoS blockchains.
But it also means that it can easily leverage on Cosmos interoperability to interact with other blockchains.
Terra’s mainnet was launched in April 2019, introducing the first stablecoin KRT (Korean won). UST (US Dollar) was subsequently launched in September 2020.
Terra Stablecoins… a better money?
If Terra is on the mission of building a decentralized financial system for everyday use, before looking at how it provides a solution to different use cases, let’s first look at how they came up with a “better money”, aka Terra Stablecoins ecosystem.
Recapping on what a Stablecoin is…
The biggest challenge for cryptocurrencies to be used on a daily basis as money is its price volatility, and the solution the crypto community came up with is called Stablecoins.
In a nutshell, Stablecoins are cryptocurrencies that maintain a stable price consistently by pegging themselves to another asset, such as Fiat currencies like the US Dollar. Some classic examples are USDT, USDC, TUSD.
For a comprehensive overview of Stablecoins before, click here.
These stablecoins have been playing an instrumental role as digital money, but from a longer-term sustainability perspective, the problem is 2 fold:
Collateral proof: just like Central Banks maintain the value of their national currency by holding Reserves in USD, gold, and/or other assets, for a Stablecoin to maintain a fixed price, the company behind needs to have the correlated Reserve that backs that pricing.
The rigorousness of audits of these collateral proof behind each stablecoin varies case by case, and a USDT market cap of over 77 billion makes a solid point to question whether Tether has the sufficient amount of assets to back this sky-high number.Censorship:now, if you have your collaterals in USD for example, you’ll probably have it in a bank account. If yes, then chances of you getting shut down are quite real if the government decides to, which defeats the whole point of censorship resistance the crypto community is trying to build.
Now, what is Terra’s solution?
The answer is Algorithmic Stablecoins.
These are Stablecoins, which means cryptocurrencies with a stable price, but instead of being pegged to a Fiat currency, the price stability is achieved by using the classic supply and demand mechanism regulated by an underlying algorithm.
Essentially, Terra Stablecoins use LUNA as a reserve currency that helps to stabilize the price. The idea is that at any given time, to mint 1 USD worth of UST, you need to burn 1 USD worth of LUNA, and viceversa. Basic law of supply and demand supported by a “mint and burn mechanism”.
The use of the name Terra & Luna is intended to be analogous to the Earth and the moon which rely on each other for gravitational stability and rotation.
So, Terra Stablecoins…
Our existing global monetary system has hundreds of currencies from different countries.
Similarly, it is important to understand that
the Terra network is in its core a group of stablecoins that is growing in numbers. Each of these stablecoins represents the cryptocurrency version of current fiat currencies, and each of them maintains its pricing using the mechanism described above.
Some examples of the already existing Terra stablecoins are of course UST (US dollar), KWT (Korean won), EUT (Euro),
Currently, UST has over 11B of circulating supply and 200M of daily trading volume, and holding one of the largest TVL (total value locked) in DeFi.
With this level of adoption, it’s giving DAI, the OG decentralized stablecoin, a real challenge.
Catering to the use cases of money…
Terra is built on the strong belief that it’s the use cases that make an economy more robust and stable, and that there is an element of stickiness in the retail-based use cases.
So now that we have arguably a better money through the creation of different algorithmic stablecoins, we can look into protocols built by Terra to cater to the classic use cases of money to ensure adoption and stickiness, and I can’t stress the importance of this enough because.
Think about it. Terra is making sure that they are providing the right product (Terra stablecoins), and also offering an attractive ecosystem (empowered by different use cases of money) where its product can thrive, and people are incentivized to use it.
This is how it comes full circle.
1. Spending Money - CHAI
Chai is a payment gateway launched in South Korea.
It integrates with most top banks in Korea, such that the user only needs to pay in Korean won and doesn’t have to interact with crypto that much. However, in the backend, blockchain technology is used to solve some major pain points for merchants in adopting digital payment:
High fees: companies like Visa, Mastercard, American Express, etc all charge merchants a transaction fee of around 3%.
Chai reduces this fee to a cap of max 1%.Settlement time: transactions might take days to settle, but many smaller merchants run their business more on a daily basis and need this working capital. They can’t afford to wait that long.
Chai's settlement time takes only 6 seconds.
Currently, Chai processes over 1 billion USD of payments per year and is used by millions of users in South Korea.
The key to Chai’s success is to offer the same seamless user experience as centralized applications while solving problems in the backend without causing additional inconvenience to the user.
This is really smart and practical. Having people use crypto without knowing they are using crypto is really the maturity stage we are aiming for in order to achieve mass adoption.
2. Saving Money - Anchor Protocol
Launched in March 2021, Anchor is a decentralized saving protocol. Think of it like a savings account, where you deposit a certain amount of money in exchange for a certain interest rate over a period of time.
In a nutshell, you can earn a pretty high interest rate by lending out your Terra stablecoins. By incentivizing users and rewarding them to hold and save in UST, Terra ensures wide adoption of their stablecoin in return. A win-win.
What makes Anchor special, are 2 things:
Stable interest rate: most DeFi lending platforms’ interest rates will vary based on the supply and demand of the market making. However, Anchor believes it is important for people to know how much to expect back, and therefore offers a stable rate.
High-interest rate: currently, staking Terra UST at Anchor offers a nearly 20% APY, which is significantly higher than what people can get from a regular savings account.
Now, you might wonder where this high yield is coming from, and how can it be maintained at such a high rate.
In short, the Anchor rate comes from a diversified stream of staking rewards from major Proof of Stake blockchains, and therefore can be expected to be much more stable than money market interest rates.
3. Investing Money - Mirror Protocol
So far, we covered an alternative money, a payment gateway to spend this money, and you have a place to save it.
How about investing it?
Enters Mirror protocol.
Mirror Protocol was launched in December 2020 by the Terraform Labs. It enables users to issue synthetic assets, called Mirrored Assets, or “mAssets”, which are crypto tokens that track the price of real-world assets, such as stocks, and digital assets.
Basically, synthetic assets provide exposure to an asset without holding the underlying resource, and without intermediaries. This way, people who would normally be excluded from investing in certain assets, either due to geographic reasons or lack of capital, can benefit from this.
The project enables global access to financial markets, low transaction costs among mAssets, and fast order execution relative to other traditional and digital exchanges.
What are some of the latest updates?
Building consistently is key in this crypto market, so let’s have a look at the latest development in the Terra Ecosystem.
Colombus 5 Upgrade
Towards the end of 2021, the Terra team pulled off their latest protocol upgrade called “Colombus 5”, which delivered some major wins:
Block capacity: Terra can now process 5,000 transactions per second, which is a 33x improvement.
Permanent LUNA burn will happen everytime a Terra stablecoin is minted, laying the groundwork to convert Luna into a deflationary asset.
A portion of the swaps fee is allocated to validators, nearly doubling their staking rewards.
Added support to Cosmos’ Inter-Blockchain Communication (IBC) Protocol to seamlessly interoperate with other blockchains, enabling Terra’s cross-chain reach expansion.
Other Projects
Terra has a bunch of other key projects that are not mentioned here, but if you are interested in going down the Terra rabbit hole, here are a few I recommend you look into:
Terra Swap: the equivalent of Uniswap in the Terra ecosystem
Ozone: insurance protocol.
Pylon: a yield redirection protocol and lossless investment protocol.
Alice: a Terra products all-in-one user friendly interface.
Terra Station: the equivalent of Metamask in the Terra ecosystem.
Additional Support:
In Mid 2021, a whopping 150M investment from VCs was announced and put together to fund more Terra Ecosystem projects.
The Luna Foundation Guard (LFG) was formed to foster the growth of the Terra ecosystem as well as ensure the stability of the UST peg. The governing council is quite impressive, including Do Kwon, Binance Labs, and other prominent names.
Final Thoughts
Some of my concerns…
Well, this is really me being picky, but when there is so much VC and private investor money involved, I tend to question a project’s decentralization level. Similarly, in terms of LUNA tokenomics, it seems that after the multiple private sales to investors in 2019, there is no clear distribution data.
Not that this is necessarily a risk, but again, I do think this compromises decentralization, which was already a minor concern considering the limited number of validator nodes that Terra runs on.
Another point of concern worth noting is some known headwinds, such as Terraform Lab’s battle with US SEC over Mirror protocol’s synthetic stock tokens, although this is definitely not the only project being scrutinized by the regulators, and we gotta keep in mind that Terra is based out of South Korea.
What I think of Terra overall
Having acknowledged the risks, I have to say that even though I only recently started to pay more attention to Terra, I definitely believe this is one of the main projects to watch.
It seems to have all the right ingredients: a solid team that can build, a clear roadmap, a holistic ecosystem, a strong treasury, and great practicality on the solutions provided (again, I’m very excited about how Terra designed its masterplan: the product, the right ecosystem for it to thrive, how to attract and incentivize users, coming full circle. It's a beautiful thing).
On top of all this, the aggressive expansion of UST relevance into other blockchains thanks to the interoperability enabled by Cosmos infrastructure is a strong point in favor of Terra’s future.
All of these add up to quite a formidable project. Needless to say, I personally am very bullish on Terra’s long-term potential.
Thanks for making it this far. Is there any topic or project you’d like me to cover in the future? leave a comment with your request!