Luna down 95% in the last day
Overview of Terra
Terra is an ecosystem that has excited the industry with their tokens $UST and $LUNA. Here is a summary of why:
- UST is an algorithmic stablecoin pegged to $1 with real-world usage.
- LUNA is the token used in the algorithm to keep UST’s peg via arbitrage. When UST trade above or (below) $1, arbitrageurs can sell/(buy) UST and buy/(sell) $1 of LUNA. Arbitrageurs pocket the difference, and UST maintains the peg.
- Algorithmic stablecoins are important in crypto because they can be truly decentralized and outside the purview of the regulation (i.e., censorship resistance). Unfortunately, these are two flaws in the currently dominant stablecoins, USDT and USDC.
- Even though prior experiments around algorithmic stablecoins have failed, many think UST is here to stay.
- First, UST has real-world applications, particularly in South Korea, where Terra is based. For example, CHAI is a mobile payment app that settles transactions with merchants using the Terra blockchain.
- Second, UST is widely adopted and has attracted over $11B in liquidity.
- Third, Terra is building an ecosystem of apps in DeFi, NFTs, and gaming that should expand the pool of users in the platform.
- Fourth, the Terra blockchain has weathered the recent volatility in crypto better than most.
- Some concerns I have around Terra include:
- Algorithmic stablecoins are still an experiment despite Terra’s competitive advantage in the real world.
- Collaboration with $MIM.X raises concerns that recent growth in UST liquidity is unsustainable.
- Terra was unaffected by the Wormhole hack, but the hacking risk is still relatively high in crypto, particularly for multi-chain bridges with complex code and higher vulnerability.
Introduction to the Terra blockchain and its Vibrant Ecosystem $LUNA.X
The role Terra's native token $LUNA.X plays in securing and capturing value for the ecosystem.
What is Terra?
- Terra is a blockchain founded by Terraform Labs, led by do Kwon.
What's so special about Terra?
- It issues its own censorship-resistant, algorithmic stablecoin. It's basically USDC or USDT, which is not controlled by an organization(decentralized), thus censorship-resistant.
Why do we need a stablecoin?
- Bitcoin as a medium of exchange suffers from the high volatility of its price, thus not the most fitting. A stablecoin, on the other hand, mimics a currency like the US dollar and keeps the value stable. Basically, it's a form of stable money.
What's so special about Terra's stablecoin?
- A stablecoin like USDC or USDT has an asset backing up its value. Terra's stablecoin is algorithmic, meaning it has no asset backing the value. Instead, the peg(value) is maintained by an algorithm.
But how does a stablecoin maintain its value algorithmically?
- This is where I introduce you to Luna, the cousin token of Terra stablecoins(though Terra UST mimicking the US dollar is prominent, other stables like INR, KRW are available in Terra)
- Luna is volatile, just like Bitcoin, while the stablecoins are... you guessed, 'stable.
Let me illustrate the mechanism:
The floor consisting of 9 tiles represents the total supply of stablecoin. Volume represents the demand for stablecoin. Height represents the value of the stablecoin, in this case, $1.
Case 1: High Demand
When more people want the stablecoin, the volume rises, and so does the height. Thus, the value of the stablecoin increases(above $1)
But we want the value to be stable(at $1). For that, we can expand the supply of stablecoin and thus lower the height(price).
Notice there are 12 tiles instead of 9, increasing the supply to meet the demand of the stablecoin.
But where does the new supply come from?
Luna. Yes, from the cousin token Luna! Terra has designed a machine that swaps $1 $1rth of Luna into $1 worth of UST(could be any currency).
When demand is high for UST, more Luna will have to be swapped into UST, thus decreasing the supply of Luna.
If you believe Terra's stablecoins will be more useful and used in the future, buy and hold Luna. Growth in stablecoins will lead to Luna being scarce, thus making it more valuable.
Luna is basically a bet on the growth of Terra's stablecoin.
Case 2: Low Demand
When fewer people want the stablecoin, the volume falls. With this price drops(below $1)
But we want the value to be stable(at $1). For that, we contract the supply of the stablecoin and thus increase the height(price).
But where does the contracted supply go?
The same machine swaps $1 worth of UST into $1 worth of Luna.
When demand is low or selling pressure for UST, more UST will have to be swapped into LUNA, thus increasing the supply of Luna.
If you believe Terra's stablecoins are 💩 and won't grow, I recommend not buying Luna.
How exactly does this machine work?
- When Luna is swapped for UST, a certain percentage of Luna is burned(removed permanently), and the rest is sent to a community pool(to fund projects that promote the ecosystem's growth). The newly supplied UST is known as Minted UST.
- The process is known as seigniorage - The value of newly minted UST minus the issuance cost (zero).
- Currently, in Col-4, all seigniorage is being directed to the community pool, and due to the growth in UST earlier this year, this led to the community pool being overfunded.
- In Col-5, all seigniorage will be burned. This is done to align with the narrative of “staking rewards come from fees, all seigniorage is burned.
Why would I stake Luna?
- When you stake(lock-up/delegate) Luna to a validator(node governing the network), you help in securing the overall network and get rewarded(similar to dividends)
- You'll be able to participate in governance, i.e., propose and vote on parameter changes, feature requests, etc.
- Currently, all swap fees are burned. In Col-5, the swap fees will instead be distributed to stakers. This will increase by staking rewards that will scale according to the ecosystem's value.
Is the community fund well off or misused?
- A governance proposal was passed to use the community fund for Ozone, an insurance protocol to insure DeFi in the Terra ecosystem. Details here https://twitter.com/Josephliow/status/1395537445161218051?s=20
- Raised a $150M Ecosystem fund backed by Arrington, Delphi, GalaxyDigital, and more! https://twitter.com/terra_money/status/1416066201189556224?s=20
Why would people use Terra's stablecoin?
- Its purely decentralized and censorship-free, backed by stablecoin adoption
- To earn 19%-20% stable yield on Anchor(one of Terra's flagship Dapp). Before you say it a Ponzi, I ask you to please read the whitepaper or a thread like https://twitter.com/FloodCapital/status/1390386887592919046?s=20.
- To invest in stocks and provide liquidity through Mirror. https://twitter.com/archon_0x/status/1377199958659579904?s=20
- To enable faster settlement and utility. Chai, Terra’s flagship payment app, raised $60 million in a Series B round. Investors included SoftBank and others. It currently has over 5M users and plans to expand throughout Asia, and it has support from some of the biggest Asia e-commerce platforms.
How does $LUNA.X accrue value?
- When Terra stablecoins like $UST.X grows, more $LUNA is burned, thus making it scarce and more valuable. It's almost a direct correlation with the growth of $UST
- Terra will incentivize users to stake Luna for rewards from swap fees, about 7% APY after Col-5 release. Currently, it's 3-4%. You'll also have governance rights. This will lower the circulating supply of Luna, making it scarcer.
- Speculation, of course.
Still not convinced?
- One of the only few blockchains with real-world adoption(Chai)
- 3rd largest blockchain by TVL(total value locked). $6B as of Aug 2021. https://defillama.com/chains
- Adoption of UST into Solana Ecosystem(one of the fastest and scalable blockchains) with wormhole
- Osmosis, a dex(decentralized exchange) in Cosmos($ATOM) will make use of $UST as the dominant stablecoin with the IBC release(Inter blockchain communication). https://twitter.com/lunatichisoka/status/1428812087376089095?s=20
- Thorchain($RUNE.X), a native cross-chain transfer protocol and my 2nd biggest position after Terra, will bring $UST after the IBC launch. Take a look if you haven't. https://twitter.com/HighCoinviction/status/1428547514492391426?s=20
- Watch a Do Kwon(founder) interview. You'll be impressed. Here's an Ark Invest interview https://ark-invest.com/podcast/ep98-terra/
Terra(Earth) consists of various stablecoins which are protected and stabilized by Luna(Moon). If you believe in UST adoption, then buy and stake Luna.
I would be happy to answer any concerns or questions on the topic. If you liked it, thumbs up and share!
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