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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.
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