Terra Luna Analysis: The Most Powerful Player in Defi

Terra Luna Logo

Table of Contents

What is Terra Luna?

Terra Luna is a 3rd generation, open source blockchain protocol bringing a list of algorithmic stablecoins to be used within a thriving defi ecosystem. Terra uses a proof of stake consensus with smart contract functionality to bring a payment focused fintech system to the masses. 

Terra Luna was first founded in 2018 by Daniel Shin and Do Kwon who started Terraform labs – the company behind the Terra Luna ecosystem. Once the project secured $32 million in funding with backers like Binance Labs, OKEx, Huobi Capital etc. it was able to launch its mainnet in 2019 alongside its whitepaper. Terra Luna was built on the Cosmos blockchain as it was the only tool available at the time to ship sovereign blockchains. 

 

There are 3 main applications built on top of Terra Luna with many more to come in the future.

  1. Anchor Protocol – Essentially a savings account with 20% APY
  2. Mirror Protocol – Permissionless protocol which allows users to invest in synthetic assets
  3. Chai – A mobile payments app powered by the Terra Luna Blockchain

Apart from the applications built on top of Terra’s blockchain, one of the key components of Terra’s ecosystem is its algorithmic stablecoins. For more information on stablecoins and why they’re important, check out our post here. UST is the most prominent stablecoin within Terra’s ecosystem as its the stablecoin which is pegged to the U.S. dollar. More on UST below. 

How Terra Luna Works

There are several aspects of Terra Luna that this section will cover; UST, Luna Token, Anchor, Mirror and Chai. 

UST

UST is Terra’s stablecoin which is pegged to the U.S. dollar and is the backbone of the Terra Luna Ecosystem. There are two main forms of stablecoins; algorithmic stablecoins and stablecoins that are back by physical assets(USDT). Algorithmic stablecoins have had a bad reputation in the past due to projects like TITAN crashing to nearly zero in a short period of time. One of the key issues with TITAN is that it has no utility or use case, there’s no real reason to own the stablecoin. Terraform Labs is solving this issue by creating an entire ecosystem of financial products revolving around their stablecoins.

 

Anchor Protocol

Has previously stated above, Anchor Protocol is the savings account of the Terra Luna ecosystem. Users can stake their stablecoins at a fixed interest rate of 20%, this is notable as most of the industry operates on a variable interest rate. A fixed APY of 20% is above the market rate that you would currently see in defi, how does Anchor accomplish this? The example below is taken from Do Kwon during the Ark Invest podcast. 

 

Think of Anchor like a bank. When you give your money to the bank they don’t simply hold onto it for you, they lend it out through the borrow market and you’re participating in the lending market. Therefore, the bank pays you an interest rate for lending them your money and they lend out your money at a higher rate and capture the difference between the rates. Anchor works in a very similar manner to this. When users borrow money on Anchor, more often than not they post collateral for their borrow. What makes Anchor unique is that they only allow for proof of stake tokens to be posted as collateral. For example, when you borrow money on Aava and use Ethereum(ETH) as collateral, that ETH isn’t doing anything for you or Aave. Because Anchor only allows collateral to be proof of stake tokens, they take your collateralized tokens and stake them to earn a return during your borrow period. 

 

Mirror Protocol

Mirror is a permission less platform which allows its users to purchase synthetic assets. For those unfamiliar with the term, synthetic assets are tokens that mimic the price movement of their traditional counterpart. For example, on mirror protocol you can purchase mTesla which is a synthetic asset which peggs its price to the price of Tesla’s stock. 

Synthetic assets aren’t perfect, they can lose their pegg in after hours trading and users can end up paying premiums for the synthetic asset. With that being said, they are a very innovative creation in the defi space which is democratizing financial access. No longer will financial assets be geographically siloed, anyone with an internet connection will have access to the same assets as everybody else. 

 

Chai

Chai is a crucial part of Terra Luna’s ecosystem as it’s the first real world use case. Chai is a payment network built on top of the Terra Luna blockchain that has gained a large traction in South Korea with over 2.5 million users. It is a POS(point of service) integration for physical merchants where customers can pay using Chai instead of traditional payment networks like Visa or Mastercard. What sets Chai apart from the competition is 1. Extremely fast settlement times. Typical payment networks take 2-3 days for the funds to go from the customer to the merchant, with chai this settlement happens in seconds. 2. Chai charges merchants 1-1.5% fees compared to companies like Visa which take 2-3%. Although a few percentage points might not sound like a big deal, when applied across millions of transactions this results in substantially more money for the merchants and less for the middlemen facilitating the transaction. 

Team

In the past, Spectacle Investing has placed a lot of emphasis on specific individuals in a given project. Although this aligns with our philosophy of investing in visionionary entrepreneurs first and businesses second, in the world of decentralization less emphasis needs to be placed on specific individuals. Unfortunately, true decentralization doesn’t currently exist in Web3 so prominent figures are still the focal point for many projects.

 

For Terra Luna, that central figure would be Do Kwon. Do has a stellar track record as a former Microsoft and Apple engineer, forbes 30 under 30, and has worked on several AI and network protocols but most importantly has built a top 10 cryptocurrency. After reading up on Do Kwon and listening to several interviews and podcasts, Spectacle is extremely confident in Do Kwon and his teams ability to execute the vision of Terra Luna.

Tokeconomics

The tokeconomics of Terra Luna is far more complex than any other project we’ve covered up until this point. Terra’s ecosystem uses two main tokens UST and Luna which act in opposite ways to balance one another. Luna is used to maintain the stablevalue of UST to the U.S. dollar through a mechanism of incentives that occur when UST is de-pegged. 

Essentially, when UST is over $1 the price is reduced by making more UST which is awarded to those that trade in their Luna Tokens for UST. When UST is under $1, users can trade their UST for $1 in Luna which shrinks the circulating supply bringing it back to $1. So where does all of this arbitrage come from? It comes from money flowing into the Terra ecosystem, when people buy UST the price of Luna will go up and when they sell UST the price of Luna goes down. Value therefore is accrued and taken away from holders of Luna but if money continues to flow into the Terra ecosystem then the price of Luna will continue to rise, with volatility along the way of course. 

Terra Luna Token Distribution
Obtained from BanklessDAO

This was a brief breakdown of the give and take mechanism of Luna to UST but the tokeconomics extends much further. A more in depth explanation can be found in the diagram below and through this post.

Terra Luna Tokeconomics Graph
Obtained from BanklessDAO

Future Outlook

At the time of writing, Terra Luna is currently at a marketcap of U.S. $28 billion with Luna being priced at $78.92. This is a sizeable fall from its all time high at the end of 2021 where Luna was at $102 but longterm holders should expect significant volatility in Luna due to the mechanisms described above. 

Terra Luna MarketCap
Taken from Coinmarketcap

As defi continues to expand and real world use cases become more prominent, Terra is well positioned to capitalize on these opportunities and be one of the leading defi blockchains for the years to come. A price prediction for Terra Luna of $1000 per Luna is very obtainable(although most likely not in 2022) and in the long-run we’re predicting that Luna can easily surpass $3000(10 year framework), of course this is dependent on adoption and execution of the teams working within the ecosystem. 

 

Everyday and every month, more and more applications are being built on Terra as there’s an expectation of 160 projects being launched in the ecosystem in 2022 alone. 

Terra Luna Ecosystem
Taken from Terra Luna Official Twitter

Not only is the ecosystem growing rapidly but Terra is also bridging itself to other ecosystems such as Solona and Binance Smart chain so that UST can be more widely available. Remember, more UST and money flowing into Terra means the price of Luna goes higher. 

Conclusion

Terra Luna has quickly become one of Spectacle Investing’s favorite web3 projects. Not only is it aiming to be decentralized(100% decentralization isn’t currently possible), has a solid founding team and ecosystem being built, and elegantly designed but it also has one of the biggest real world use cases compared to all the other crypto projects. This isn’t to say that other cryptocurrencies aren’t being sued in real life but few can say that they have 2.5 million people using their blockchain for daily purchases and transactions. And Chai is but a small portion of Terra Luna’s rapidly growing ecosystem, we predict the demand for UST to rise significantly over the next decade and alongside the real world applications being built on top of Terra Luna’s ecosystem. Top 10 watch for us at Spectacle Investing. 

Main Points

  • Brilliant design
  • Bootstrapped real world use cases
  • Excellent team and ecosystem being built
  • Long term development mindset
  • Very early, ton of upside available
9.5/10

For more analysis of decentralized projects check out  Ocean Protocol and SingularityNET.

 

Interested in Blockchain gaming? Check out our Video Game Market Analysis as a precursor to our Blockchain Gaming analysis(coming soon). 

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