Terra is a smart contract-enabled blockchain that harnesses the utility of Cosmos’ CosmWasm technology. Powered by the native token LUNA and the TerraUSD coin (UST), the Terra blockchain has become a compelling building ground for blockchain-based applications. Terra Core builds on Tendermint consensus and the Cosmos SDK toolkit.
UST: The True Decentralized Algorithmic Stablecoin
The genius of Terra lies in the design and adoption of its stablecoins, which correlates to the success and value of LUNA. On one hand, as explained in one of my previous articles (UST on Solana: A Mission to Become the Cross-chain Decentralized Stablecoin), UST is on its way to becoming one of the most dominant cross-chain decentralized stablecoins. In contrast to fiat-collateralized stablecoins (e.g. USDC and USDT) and crypto-collateralized stablecoin (e.g. DAI and sUSD), UST is a non-collateralized algorithmic stablecoin. UST maintains its peg through market arbitrageurs and real underlying demand for UST thanks to the rich ecosystem of applications built on top of Terra as well as the cash flow generated by staking LUNA. Moreover, everytime UST is minted, it requires an equal value of LUNA to be burned. $1 worth of UST minted equals $1 worth of LUNA burned. Personally, I find the tokenomics of LUNA fascinating, as its success is highly correlated to the demand for Terra stablecoins. In short, increased demand for UST equals a reduced supply of LUNA (aka burned LUNA), which ultimately means that the price of LUNA appreciates.
The Terra Finance Ecosystem (TeFi): A look at the power of native and high-yield Stablecoins
Anchor Protocol is a fixed-income savings protocol. Known as the current Terra flagship protocol, anyone can lend their UST to earn approximately 20% APY. Technically, Anchor leverages liquid staking derivatives to attract lenders and borrowers. Today, the savings platform accepts as collateral bLUNA and bETH, which are a liquid and pegged (or bonded) version of staked LUNA and ETH. Thus, these productive assets accrue staking rewards while being collateralized in Anchor.
In opposition to other lending protocols in the DeFi space, Anchor’s fixed rate is determined by block rewards and fee accrual of dominant layer 1 blockchains like Terra, Ethereum 2.0 and (post Columbus-5) Cosmos (bATOM), Polkadot (bDOT) and Solana (bSOL). This mechanism represents a significant value-add for PoS token holders as they can borrow stablecoins against their staked tokens, in addition to the staking rewards. In a cross-chain DeFi world, Anchor could certainly become the benchmark for all lending rates.
We also wanted to give an honorable mention to Orion Money, which is one of Anchor’s main money legos. Orion acts as Terra’s UST black hole by sucking stablecoins from other blockchains (starting with Ethereum) in exchange for Anchor’s offer of savings. In other words, Orion Money is a cross-chain savings protocol that allows you to save, lend and spend stablecoins.
The most anticipated upgrade to the protocol, Columbus-5 (Col-5), will go live at the end of September. People have made the following analogy: Columbus-5 is like EIP-1559 on steroids. For now, most of the Terra DeFi primitives have yet to be launched, pending Col-5. Once launched, we should see a sharp increase in UST demand and user numbers on Terra, starting the official “Terra Autumn”. Before diving deeper in the new protocols, let’s summarize the Columbus-5 key benefits:
- A reduced LUNA supply: Today, minting $1 worth of UST requires the burning of an equal dollar amount of LUNA. Then, a portion of the burned LUNA is actually transferred to the community pool. In the Col-5 era, this portion of LUNA will also be burned.
- Stronger cash flow for LUNA stakers: Staking rewards for LUNA will increase significantly with the distribution of trading fees (Tobin Tax) to stakers instead of being burned today.
- Cross-chain integration: The Inter-Blockchain Communication (IBC) compatibility via the Stargate upgrade. IBC is a part of Cosmos and enables Terra further integration opportunities with a huge number of PoS chains and dApps (e.g. UST could be integrated to Osmosis pools).
- Transaction speed: The Stargate upgrade will also enable higher transaction throughput, increasing the scalability of TeFi.
- Insurance and safety: Ozone is Terra’s native insurance coverage protocol. It will provide greater peace of mind to participants holding and trading Terra assets.
Terra: the next DeFi wave in perspective
Heading towards #TerraAutumn there has been a lot of hype about the many new projects that will be launched soon on Terra. These projects include Mars, Astroport, Levana, Nebula, Prism, Angel, White Whale, and so on.
Automated market makers (AMMs), decentralized exchanges (DEXes) and lending platforms are the core components of any successful blockchain. In its current form, Terra lacks protocols that meet these needs, but not for long. I’m very excited for the two following highly anticipated DeFi primitives. First, Mars protocol is the next credit protocol (i.e. decentralized banking) for borrowers and lenders. Second, Astroport is the next AMM DEX for traders and liquidity providers that will offer much more sophisticated functionality than TerraSwap.
Mars, which serves as a lending and borrowing platform, similar to AAVE, distinguishes itself from other money markets with the following innovative features:
- Uncollateralized & credit lending: Non-depositor borrowers will be able to increase their size position via borrowing UST on credit;
- Dynamic interest rates based on control theory: With new mathematical models that continuously adapt to changing market conditions, interest rates for borrowers, lenders and stakers will benefit from real-time changes in interest rates;
- To know more about the governance, tokenomics and the protocol in general, please visit the Mars Medium website here;
Astroport is a next generation AMM DEX that will become the hub to provide liquidity and trade Terra assets. The liquidity hub will also offer unique features from well known DEXs and AMMs like Uniswap, Sushiswap, Balancer, Curve and Bancor. The new core features will be around AMM pools. Thus, participants will be able to join various types of pools for swapping tokens and bootstrapping liquidity for new tokens. To learn more about the governance, tokenomics and the protocol in general, please visit the Astroport Medium website here.
NFTs: capturing cultural value and building new primitives
Bridging TradFi to DeFi
In addition to everything else that’s coming up in the Terra ecosystem, we shouldn’t underestimate the importance of applications acting as a portal between the traditional finance (TraFi) world and the DeFi universe. From the very beginning, Chai has been a pioneer in South Korea to facilitate payments in KRT (South Korean Won) and UST. Furthermore, Kado Money introduces a gateway to swap UST and USD in addition to spending UST in daily life. Lastly, the highly anticipated all-in-one platform to manage personal finance (similar to a neobank) Alice is powered by Terra and more precisely Anchor. What a time to be alive!
Stake and Learn with Figment
The Terra ecosystem continues to mature overtime with the introduction of new upgrades, DeFi projects, and more. While the Terra ecosystem continues to grow, and the cryptocurrency markets continue to be volatile, Terra is staying true to its goal of fostering mass adoption through stablecoins.
Interested in staking LUNA? Follow along our guide using the Terra Station dashboard here.
Interested in building on Terra? Figment Learn is the easiest way for Web 3 protocols to onboard and educate developers. We provide developers the tools and resources they need to succeed, like tutorials for writing your first Terra smart contract, querying the Terra blockchain, and more. Check out Figment Learn for Terra here.