Erik Weijers, a year ago

The great ambition of Terra (LUNA)

The Terra protocol is home to the fourth largest stablecoin in the world: US Terra (UST). After the successful launch of the payment app Chai in Korea in 2019, which is built on the Terra blockchain, the Terra network's native token, LUNA, broke through globally in 2021. It is now a top 10 crypto.

Terra is built on Cosmos, an interoperable blockchain. Terra's goal is to give people worldwide access to all kinds of different assets - even if they didn't have access to them through traditional markets before. For example, because they live in the wrong country, or aren’t ‘qualified investors’. Another belief of Terra's founder Do Kwon is that crypto should be user-friendly: one aspect of this is price stability. Hence, UST was created asa stablecoin. LUNA, on the other hand, is anything but that. Its value has exploded.

Update: please note the publication date of this article. Since then, a lot has happened, including a collapse of Terra's Anchor Protocol, LUNA and their stablecoin UST. There has been a complete rebranding from Terra (LUNA) to Terra Classic (LUNC).

UST as a benchmark

UST is Terra's main product: the decentralized stablecoin. Terra's goal is to make UST the leading stablecoin. Unlike many existing stablecoins such as Tether, Terra is not centralized. With Tether, for example, as a holder you are at the mercy of the company that holds Tether's collateral. You have to trust that they won't run off with it, after which Tether's price could plummet. Instead, the value of UST is kept constant by algorithms: by automatically burning or minting UST if the price threatens to deviate too much. Hence, UST is also called an algorithmic stablecoin. Besides UST, Terra also has stablecoins for the euro and the Korean won, among others.

The role of LUNA in Terra's ecosystem

LUNA is the token used to keep the value of UST constant against the dollar. It is thus the collateral for UST. LUNA is also used for transaction costs. How does this work, keeping UST stable? Suppose UST is temporarily worth a little more than a dollar. In that case UST is "minted". The users who made their LUNA available get the UST, plus a small profit. Has UST dropped slightly in value? In that case UST is taken out of circulation ('burned'). This is done by having holders of UST give up their UST and give them the dollar value in LUNA in return. As a result, they make a small profit. After this back-and-forth, there will be less UST in circulation, which raises the price.

Three main apps

There are three main apps in the Terra ecosystem: Anchor for saving, Mirror for investing and Chai for transactions. As these three apps are integrated into one ecosystem, it's easy to, for example, take your savings profits and put them to use for payments or investments. It’s one system.

  • Anchor acts as a kind of savings account where you get 19% interest on your UST. You can also borrow UST with LUNA as collateral with Anchor.
  • Mirror is a protocol that makes it possible to own so-called synthetic assets. The assets created on Mirror – as the name suggests - mirror assets from the real world. That is, they track the price as closely as possible. On Mirror they are called mAssets: for example, Tesla becomes mTesla. So on Mirror, no matter where you live, you can buy (synthetic) gold, Tesla shares, real estate in Europe, and so on. And that in very small fractions too. It is perhaps not surprising that the SEC in the United States subpoenadTerraform Labs. The SEC is in danger of losing its grip on trading in these unregistered securities.
  • Chai is a payment app for ordinary consumers that is already widely used in South Korea. Looks like any other payment app but behind the scenes this app uses UST on the Terra blockchain. Shoppers pay only a fraction of the transaction fees of the usual 2 to 3%.

The future of Terra

Terra shows that in crypto it pays to launch a product for the masses rather than a niche application for ‘defi degenerates’. Is there still room for growth? Certainly. UST is not yet a top 3 in the stablecoin market: it comes after USDT (Tether), USDC and Binance USD (BUSD). For comparison, there are 80 billion Tether USD in circulation, compared to 10 billion UST.

On the other hand, the question is what makes UST so unique that it cannot be easily copied. And Anchor or Mirror are fairly standard defi applications. The Terra ecosystem has few other widely used apps.

Bottom line is that the more people start using UST, the more valuable LUNA will become. So you can buy LUNA if you are bullish on the Terra ecosystem. But of course you can also buy it to actually use it, for example in the Mirror and Anchor protocol mentioned above.

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