Terra is a platform built around fiat stablecoins. It aims to displace the traditional banking world with a variety of decentralized applications. The platform offers a steady return on stablecoins and makes it possible to trade synthetic stocks in the blockchain. This article explores the Terra platform with its LUNA and UST tokens.
Terra is a Proof of Stake blockchain
Let’s first place Terra into the correct cryptocurrency category. We divide cryptocurrencies into three clear subcategories: currencies, platforms, and tokens.
The best-known representative of the currency category is Bitcoin. Currencies have no other significant purpose than transferring or storing value. Other well-known currencies are Litecoin and Monero.
The platform category includes various smart contract platforms that can be used to build decentralized applications (Dapps). Platforms include Ethereum, Solana, and Avalanche, for example. Platforms can be thought of like iOS and Android.
Tokens are issued on the existing platforms and do not have their own blockchain. Tokens are usually either utility tokens or governance tokens. Aave and Chainlink are two popular tokens.
Terra falls into the platform category. It is competing against Ethereum and other previously mentioned platforms, especially in the DeFi sector.
LUNA is Terra’s native token. It has many uses, like paying the transaction fees and staking. LUNA token stakers ensure the safety of the Proof of Stake blockchain. LUNA can also be used to issue UST stablecoins.
UST is the largest stablecoin in Terra. Its price is pegged to the U.S. dollar. In a short period of time, UST has become the fifth largest stablecoin in the market.
Terra wants to solve the crypto payment issue
Terra has its roots in South Korea. The project was created by a blockchain company Terraform Labs in January 2018. Daniel Shin and Do Kwon are the two founding members. Both have studied economics and computer science at prestigious U.S. universities. They have also experience as start-up entrepreneurs.
Terra was created to solve the challenges of crypto payments. For example, paying with Bitcoin is problematic because the currency is very volatile. Another problem is the tax penalty for the positive development. Terra’s goal was to issue stablecoins that are pegged to fiat currencies.
Terra’s MainNet was released in April 2019. At the same time, the project introduced the KRT stablecoin, which follows the price of the South Korean Won. KRT stablecoin is already used in dozens of different applications.
The largest of these is Chai, which is said to have more than 2 million users. Because Chai uses Terra’s blockchain, it is one of the largest decentralized applications with nearly 100,000 daily users.
In September 2020, Terra started to issue UST stablecoin. It is pegged to the U.S. dollar. Demand for UST began to grow rapidly in December 2020, when the Mirror Protocol started operating. Mirror Protocol enables the trading of synthetic assets.
Terra’s popularity has also been boosted by other DeFi applications. One of the best-known examples is Anchor Protocol. It offers up to 20% returns for stablecoins by collecting block fees from other Proof of Stake blockchains.
The year 2021 has been a huge success for Terra and its LUNA token. At the beginning of January, the project wasn’t even in the top 50 rankings with a market cap of $400 million. Now Terra’s market cap has broken $20 billion, and the LUNA token has been in the top 15 for a long time. The UST stablecoin has also grown significantly.
At the time of writing, Terra is the fourth largest DeFi platform in the market measured by TVL (Total Value Locked). Only Ethereum, Binance Smart Chain, and Solana are bigger.
The challenges of stablecoins
Terra’s stablecoins are so-called algorithmic stablecoins. The fiat peg is achieved with incentives. The problem for the most popular stablecoins (USDT and USDC) is the lack of transparency and decentralization.
The picture below is a report published by Tether about its reserves from spring 2021. Note the small percentage of treasury bills and cash.
The problem with the third popular stablecoin, DAI, is its relation with Ethereum and ETH. DAI has long been secured by ETH, so Ethereum volatility has also threatened the stability of DAI.
MakerDAO, which issues DAI stablecoin, has recently sought to mitigate this effect by giving the USDC a greater role as guarantor of DAI. The problem here again is the decentralization. Issuing DAI can also be very expensive due to Ethereum’s high transaction fees.
Terra’s algorithmic stablecoins
Algorithmic stablecoins have existed before Terra. These projects have almost invariably failed due to a lack of popularity. Also, algorithmic stablecoins have failed to track the price of the U.S. dollar accurately enough.
Terra’s UST stablecoin strives for a more scalable solution that takes better account of demand and supply mechanics. Terra’s incentive algorithm adjusts UST’s supply according to its demand. This is also where the LUNA token comes in.
To put UST tokens into circulation, an equal dollar amount of LUNA tokens must be spent. These LUNA tokens are then burned (removed) from circulation. The more demand there is for UST, the more demand (and less supply) there is for LUNA, which is also raising the LUNA dollar price.
Example: What happens if the price of UST goes up by 5% to $1.05? LUNA token owners can use arbitrage to switch their LUNA tokens to UST stablecoin, after which they can sell their UST’s on the market for 5% higher price.
The same logic works in an opposite situation. If the UST loses 5% of its price, UST holders can burn their UST and trade it for LUNA. This in turn will drive UST demand and shift it towards the value of $1. The video below briefly explains how Terra works:
All stablecoins created on Terra’s platform follow a similar incentive algorithm. This balance between stablecoins and LUNA tokens reflects the relationship between the Earth (terra) and the moon (luna), in which both rely on each other’s weight forces and rotation.
Columbus-5 update improves LUNA’s tokenomics
Terra is a Proof of Stake blockchain, so LUNA validators run the blockchain and earn staking rewards. The more LUNA you stake, the more rewards you earn. Small investors can also delegate their LUNA to validators.
LUNA is also Terra’s governance token, which allows holders to propose and vote on changes to the protocol. The picture below shows Terra Station. Voting and staking can be done there.
Terra’s blockchain is capable of approximately 10,000 transactions per second. One transaction is confirmed in about six seconds with fees of only a few cents. Like many other Cosmos-based chains, Terra’s limit for nodes is 100. Thus, it is far less decentralized than Ethereum.
Terra has recently undergone important updates. The Columbus-5 update was released at the end of September 2021. Among other things, the update simplifies the tokenomics of LUNA tokens by removing from circulation all LUNA tokens needed to issue UST. It also increased staking rewards and enables Terra to be more easily integrated with other platforms such as Cosmos, Ethereum and Solana.
LUNA token as an investment
Terra’s LUNA token has quickly grown to become one of the top 15 cryptocurrencies. LUNA is ranked 12th at the time of writing (November 2021) this article.
The wild rise has been driven by the popular Mirror Protocol and Anchor Protocol, as well as demand for UST stablecoin in these applications. For example, in Mirror Protocol a user must deposit UST to create a synthetic version of a stock.
Terra is a growing ecosystem, and new applications are being built all the time. The more applications there are, the more LUNA tokens are needed to issue UST stablecoins. At the same time, LUNA tokens are burned from circulation. This will decrease the supply and lead to a price increase.
Pylon Protocol is also an interesting application. It allows people to use their Anchor earnings for various things, such as paying for a Spotify or Netflix subscription or even paying the rent in the future.
Ozone is Terra’s own insurance protocol. It may attract more whales or institutional investors to Terra’s DeFi platforms.
Terra’s market cap ratio to assets locked on the platform (TVL) is better than, for example, Ethereum, Binance Smart Chain, and Solana. This means Terra could realistically have a chance of growing among the top 10 cryptocurrencies.
With the Wormhole integration, Terra’s UST stablecoin could also start to enter the Ethereum and Solana DeFi protocols, which would naturally increase UST demand wildly.
However, there are also some dark clouds. In March 2021 Coin Bureau highlighted ambiguities in the LUNA allocation. Instead of a public ICO, Terra only had a private sale in early 2019. Private investors included Binance, Huobi, OKEx, and a few investor companies.
According to some sources, 210 million LUNA tokens were sold in private sales, while in other stats the figure is 385 million.
The maximum amount of LUNA tokens is 1 billion, which, however, varies due to the LUNA token burning mechanism. If there are more than 1 billion LUNA tokens, the system removes LUNA tokens from circulation.
It is unclear how many LUNA tokens were originally issued.
The token allocation also reveals that only 4% of all LUNA tokens were reserved for the public. A significant part of the tokens was distributed to insiders. The last vesting periods on these tokens will end during the spring of 2022.
It is also unclear how U.S. regulators will see the new stablecoin. UST is algorithmic, which means is not backed by bank deposits, and the U.S. authorities cannot just prohibit it easily.
However, LUNA token’s fiat on- and off-ramps can be made more difficult if it would be classified as security. This could cause cryptocurrency exchanges to remove it from their selection, which would mean significant drop in liquidity.
We saw a hint of possible issues at September’s Mainnet 2021 event in New York, where Do Kwon was sued by the U.S. Securities and Exchange Authority (SEC) just as he was about to have his speech. According to many sources, the this was specifically related to Mirror Protocol.
LUNA token’s price rise is directly related to UST stablecoin demand. If you think the authorities will make it difficult to use USDT and USDC, LUNA can still be a potentially good investment outside the top 10 cryptocurrencies.
The improvements brought by the Columbus-5 update in terms of integration with other platforms may also bring significantly more demand for UST stablecoin.
Terra LUNA price and how to buy LUNA
If you want to invest in the Terra project, LUNA is the one that gets its value from the use and popularity of the protocol. The UST stablecoin is always worth about $1. LUNA tokens can be bought from Binance, where trading pairs include LUNA/USDT, LUNA/BUSD, and LUNA/BTC.
If you want to change USDC to UST and generate 20% returns on Anchor Protocol, the UST stablecoin can be found in KuCoin and Coinbase (ERC-20 version) as an exchange pair for USDC. To use Anchor Protocol, you must first install the Terra Station wallet.
LUNA can be also staked, even though the staking rewards are only a couple of percent. More and more new protocols are being created in Terra’s ecosystem and these may reward LUNA token stakers with airdrops.
This is what Mirror Protocol did too, which awarded not only stakers but also UNI token holders. If you owned at least 100 UNI tokens in an Ethereum wallet in November 2020, you were entitled to claim 220 MIR tokens (approximately EUR 600 on the price at the beginning of November 2021).