Although the cryptocurrency space has grown tremendously in recent years to an estimated market cap of about $2.5T, the adoption of cryptocurrency a form of transaction remains low.
According to Chainalysis, total transaction volume across cryptocurrencies in 2021 was about $15.8 trillion. Sounds impressive, but it pales in comparison against SWIFT’s estimated daily transaction value of $5 trillion.
There are several challenges to the mass adoption of crypto, the most glaring issue being the volatility of cryptocurrency prices.
This was the price of Bitcoin in the last 1 year:
In November 2021, your coffee at Starbucks would have cost about 0.00008 BTC but today, it would could you 0.00013BTC, almost 2x more (in Bitcoin terms).
Enter Stablecoins – a cryptocurrency designed to maintain a stable value over time. We’ve written a guide to stablecoins and how they work previously, hence I won’t go into too much details here.
The most obvious way to design a stablecoin is to back it with real fiat value – so, you pay $1 in fiat cash for every $1 of stablecoin created. Sounds easy enough, but problems arise as utility grows – someone needs to hold all that fiat cash somewhere. This leads to logistical cost and security issues.
Terra proposes an alternative solution:
What is Terra Luna?
Terra is a blockchain platform that supports algorithmic stablecoins pegged to fiat currency. It aims to create a digital financial system that is independent of major banks.
Its native currency is the LUNA token.
How does Terra work?
The Terra stablecoin ecosystem works a lot like the central bank, except that it is algorithmically managed.
There are two major components: LUNA tokens and Terra USD (UST).
The value of UST is kept (aka ‘pegged’) at US$1 using an algorithm that relies on simple supply and demand. It is executed by manipulating the supply of LUNA.
- If UST goes above US$1, LUNA will be burnt to mint UST (think of it as using LUNA to buy UST). This increases the supply of UST and brings its price back to US$1.
- If UST goes below US$1, then the opposite will be done: UST will be burnt to mint LUNA. This reduces the supply of UST and brings it back to US$1.
At the point of writing, Terra has issued stablecoins in 14 currencies including USD, KRW, SGD, RMB, EUR and more:
Currency exchange rates between TerraUSD and the rest are closely related to the actual rates through the use of oracles which pulls up-to-date exchange rates.
Has it held up thus far?
TerraUSD has grown to become the 4th largest stablecoin by market cap with a circulating supply of 14B UST:
Under the hood, Terra is a Proof of Stake blockchain that uses the Tendermint consensus mechanism (that’s a topic for another article). Basically, this means that transactions are validated by token holders who lock up (aka ‘stake’) their coins. Stakers receive a reward for locking up their coins and securing the network.
Terra Luna’s use cases
Terra has demonstrated a wide range of use cases, including payment solutions that are enabling merchants to accept crypto payment. The most popular example is:
Front-end for crypto payments
Terra has a slew of payment solutions apps that make it easy for non-crypto holders to use its stablecoins for transactions. It has been dubbed as “Alipay on blockchain” by Techcrunch.
The most prominent example is Chai, a mobile payment app that is powered by the Terra blockchain. It was launched in 2019 and has been working with merchants to grow its user base in Korea since. Chai removes the barrier to crypto adoption by allowing users to connect to their bank account and exchange their Korean Won for stablecoins TerraKRW (KRT) at a 1:1 rate.
Its growth strategy is similar to that of most payment apps where users are incentivised with cashback or other deals.
The mobile payment scene is highly competitive in South Korea with competitors like Kakao Pay, Samsung Pay and many others. And the success of CHAI would depend on its ability to attract users and merchants against the existing solutions.
They plan to do so by offering lower fees for merchants which could allow them to onboard more merchants overtime.
CHAI has been relatively successful in the South Korea markets and reportedly works with 2,200 merchants. Carousell and Qoo10 were also listed as potential merchants previously.
The same model is being employed by other fintech companies like Outlet Finance and Alice in the U.S., Kash in the U.K and Jinkou which is headquartered in Singapore.
Anchor
One simply cannot talk about Terra without mentioning Anchor Protocol, the decentralised lending and savings protocol that offers an attractive (19.5% currently) yield on the TerraUSD (UST) stablecoin.
The high yields have attracted crypto investors, and there is about $15B UST locked up on the protocol at the time of writing. They are able to sustain the high yields due to a combination of factors which I won’t dive into in this article.
Mirror
Another core dApp on the Terra ecosystem is the Mirror protocol which allows users to invest in synthetic assets that mimic the movement of the real-world counterparts. This means that you can invest in synthetic Tesla or Alibaba stocks using crypto with Mirror capturing price movements using Oracles.
Why would anyone want to invest in the synthetic versions of these stocks when it doesn’t confer ownership in the company? Well, because Mirror opens up a range of additional deFi capabilities built on top of these synthetic assets. For example, you can farm additional returns by using your synthetic assets to earn ‘dividend’ yields off your holdings.
Mirror protocol requires a dedicated article, if you’re like to learn more about how the Mirror Protocol works, let me know in the comments below.
Growing Ecosystem of dApps
Aside from Anchor and Mirror, the Terra’s ecosystem has been growing steadily as well. Like most L1 blockchains, you’ll find NFT marketplaces, gaming protocols like Derby Stars and deFi dapps.
Here’s a snapshot of the various decentralised applications on the Terra network, as of 2 Jan 22:
LUNA Token
LUNA is Terra’s native token with a dynamic maximum supply of 1 billion LUNA – remember that LUNA is used to manage the value of UST hence its supply would fluctuate depending on UST’s value, on top of market sentiments and narratives.
How to buy Terra Luna?
You can trade LUNA on most major crypto exchanges like Gemini, Coinbase, Kucoin, Binance, FTX and more.
You can also swap your existing tokens for LUNA on decentralised exchanges (DEX) like Osmosis, Astroport and Beethoven-x.
Risk
At this point, it is worth mentioning the key risk in Terra’s stablecoin ecosystem.
The Death Spiral
Being an algorithmic stablecoin, UST’s value is vulnerable to unforeseen price movements of LUNA which could cause investors to panic sell.
Back in May 2021, the value of UST depegged and fell below $1 for about 15 days:
This was sparked off due to the drop in LUNA prices which triggered a series of liquidation on borrowers’ position on Anchor protocol and led to a cascade of events which caused the depeg. If you’re curious, you can watch this video to learn about the technicalities of how it happened.
Since then, the Terra community had learnt from the event and had voted for preventive measures to be introduced. These measures were tested between Jan to Feb 22 where crypto prices crashed, fortunately UST’s peg had held on relatively well.
That said, you should be aware that the risk of a depeg still stands.
That’s not all, Chris Ng shared 4 risks of investing in stablecoins here.
May 2022 update: UST has depegged. You can read about what happened here and how the UST-LUNA meltdown could affect the crypto industry here.
Conclusion
The Terra (LUNA) blockchain enables an ecosystem of algorithmic stablecoins.
The key risk or challenge to Terra’s long-term success would be the potential legalities of the stablecoin ecosystem. There’s no telling how this would unfold – would governments around the world reject UST as a major stablecoin and would Terra be able to navigate such issues?
That said, Terra has been successful in a niche where many have failed (eg. Basis coin and Iron Finance). At the point of writing, it has grown to become the 4th largest stablecoin by marketcap, overtaking DAI.
Terra remains relatively new having been launched only in 2019. Their work and growth in the current ‘bear’ market would be key to their future success.
I hope this introductory article has given you a better understanding of Terra.
If you wish to learn more about cryptocurrencies, join AK at his live masterclass to learn the fundamentals you’ll need to get started.