Terra is the brainchild of former Apple and Microsoft developer turned entrepreneur Do Kwon and his associate Daniel Shin. First, let’s discuss its origin.
Taking you back to the beginning, Terra launched in 2018 with a bold promise to be the system that would onboard millions of people to digital currency by providing a stable environment to grow crypto adoption.
Crypto is generally hard to access and difficult to understand world for outsiders or ‘normies’ - Terra faces this challenge with the clear goal to create an ecosystem with applications that reflect those offered in the ‘normie’ world going from savings (Anchor, Glow) and loans (Anchor) to stocks and other asset trading (Mirror). There are also exchanges (Astroport, TerraSwap, Loop), community-based reward systems (Loop), and farming programs that allow investors to earn tokens in a number of different protocols like Apollo and Spectrum. The goal of all of this is to build an ecosystem of DeFi applications with a strong focus on user experience and simplicity.
What is Terra Luna and How Does the System Work?
First of all, let’s understand the different tokens that are in existence.
- Governance and regulation token - Terra Luna: This token is the rock for the entire system. Put simply, Luna is the token that increases and decreases in supply and price in order to maintain the stability of the second series of tokens.
- Stablecoins - the most important of which is UST, along with a series of other currencies that synthetically mirror fiat currencies like Euro and USD.
Luna is a token at the heart of the Terra system and is the counterweight to a basket of ‘stablecoins’ whose value is pegged to mirror that of their fiat world counterparts – the best example being UST, a decentralized equivalent to the US Dollar.
In order for UST to maintain a near 1:1 relationship with the US Dollar, it is necessary for LUNA to be minted (if demand for UST falls) or burnt (if demand for UST rises). In Terra, a growing ecosystem, Luna is generally burnt as the supply of UST expands. This is the primary price growth and deflationary mechanism for Luna.
Terra - Growth and Expansion
Terra sets out to bridge the traditional finance world (TradFi) to the new decentralized finance world - DeFi.
Things have moved very quickly indeed from as recently as January 2021, when Terra had 2 major tokens live and the premium token Terra Luna was ranked around 300th in market cap and was available to buy for less than $1 USD.
By Q3 2021 Terra had a host of protocols, including Luna token and UST both being in the top 30 coins by market cap.
This article is a walk through the journey that sees Terra set to be one of the most exciting ecosystems in 2022 and beyond as we look to the future where you can be your own bank, gain interest rewards higher than traditional banks whilst also benefiting from early investment ‘seed’ opportunities.
A financial system needs more than just a stabilization mechanism - it needs the financial instruments of savings, investments, and asset & money management. Anchor tries to accomplish these tasks.
What is Anchor?
Anchor is a protocol promising ‘Better Savings’, allowing you to deposit your UST to secure returns on UST invested of up to 20%, an eye-watering level of return compared to TradFi opportunities.
Anchor Protocol serves as a money market between lenders and borrowers of stablecoins. The lender can deposit their stablecoins on the platform for lending and earn interest on it. The borrowers, in turn, can borrow these stablecoins by providing stakeable assets (bonded assets) as collateral.
Anchor Protocol operates using a liquid staking mechanism. Luna can be offered as collateral (when not staked, on its bonded form) for loans where the borrower receives UST. Staking rewards earned on bLUNA and bETH by borrowers are liquidated by the protocol into UST for depositors allowing them to earn target yield up to 20%. If you want to learn more about how the Anchor Protocol offers such a high yield, you can read this Medium article.
Due to the way the system can operate in its early stages, it has been possible to draw down a greater return from the bLuna collateral than that cost associated with the loan, therefore making money from a leveraged borrowing situation.
This carries risk and may lead to liquidation if the LTV (Loan to Value ratio) is too high, resulting in a loss of the collateral as the loan is called in and a liquidation event occurs. Put simply, if the value of the asset you have used to secure your loan against, for example, Luna, falls in price to such a level that the loan is no longer sufficiently covered, you’ll lose your Luna.
This stable and strong savings protocol is the base for a range of other apps and tools including Glow Yield, Kujira, White Whale, and Orion Money, among others.
What is Mirror?
Another very interesting protocol is Mirror, offering a system that allows individuals to trade on the price of an underlying asset or commodity - the most popular being stocks such as Tesla or Apple where Mirror offers a ‘m’-asset that tracks the price of the underlying security.
Developments in this space look set to grow beyond asset prices to also offer the opportunity to take positions on predictive markets such as temperature, fruit prices, and snowfall.
Mirror allows 24 hour a day trading of synthetic versions of assets - in late 2021 famous trading collective Wall Street Bets adopted Mirror for the backend of their own trading platform - a first step towards introducing crypto to the normal population as a backend. This is a theme that we will see more and more over time as Terra applications embed into traditional finance environments.
Glow - Another Real-World Use Case for Terra
Glow is another protocol that is set to launch with a very exciting and fun savings concept that will allow customers to invest in a wide range of yield-bearing products.
- Glow Lotto is a prize-linked savings account or no-loss lottery. Part of the Anchor accrued interest goes to grow your savings (about 5% annually, depending on market conditions) while the remaining part goes to the mentioned lottery pool.
- Glow Creators: Leveraging yield, creators are able to build a loyal, dedicated supporter base. It enables creators to build their own token-based community without taking money away from their fans. There will be a beta version at the end of the year.
Since they have built their SDK, it will be very easy for developers to come up with new dApps that leverage Anchor’s yield to expand decentralized finance around the world.
Bringing Terra to the High Street
As we look to embed crypto in real-world locations, Terra has a number of plans to expand including becoming the currency of the city of the future - starting with Busan in South Korea where the steps are underway to allow usage of the system by its 7m+ population.
Applications such as Travala allow users to purchase travel and accommodation using a variety of currencies including UST - this is a major bridge to general population usage as it offers a gateway solution to buy services using Terra and other cryptocurrencies.
Conclusions and Next Steps
Terra offers a vast sandbox in which to design and build a broad-based DeFi system with use case adoption that will provide onboarding for non-technical non-crypto folks who can benefit from yield management rewards.
Imagine a savings account in US dollars that is backed by UST and Anchor driving its rewards so a saver could receive 10% interest per year with the promise of periodic bonuses. An app where you can book your next holiday without the need to use a Terra wallet as your account converts to crypto in the background. Your next business loan could be offered to you from a pooled crowdsourced investment, all backed behind the scenes by Terra - it all gives you a real glowing feeling about the potential financial future.