Deep Dive into Terra (LUNA)
The stablecoin opportunity
To the layperson stablecoins are as exciting as watching grass grow. They don’t go up, they don’t go down, so what is the point?
A stablecoin, in its simplest definition, is nothing else than a digital representation of a fiat dollar. They are designed to provide users with the security of cryptocurrency while also removing the volatility usually associated with cryptocurrencies.
Simply put, stablecoins are important because they are the bridge between traditional money and digital value.
I have already explored stablecoins at nauseum in my previous post on Medium. Today, I would like to take a deeper look at one of the rising stars of the stablecoin world, which is Terra (LUNA).
So what is Terra (LUNA)?
In short, Terra is a blockchain project developed by Terraform Labs that powers numerous stablecoins and decentralized applications (dApps). These stablecoins include the Terra U.S. dollar, or Terra $UST, that is pegged to the U.S. dollar through an algorithm.
Terra UST is an algorithmic stablecoin that is intended to reduce the volatility endemic to cryptocurrencies like Bitcoin. In contrast, fiat-collateralized stablecoins, like Tether, are pegged to more conventional currencies, like the U.S. dollar, through cash and cash equivalents as opposed to an algorithm token.
To mint new Terra UST tokens, a percentage of another digital token and reserve asset, LUNA, is “burned.” If the demand for Terra UST rises with more people using the currency, more LUNA will be automatically burned and diverted to a community pool. That balancing act is supposed to help stabilize the price.
Why is Terra (LUNA) a rising star?
Ran Neuner of Crypto Banter explains it rather beautifully. (Tune in at the 33:30 mark).
The narrative presented is that fiat-collateralized stablecoins are increasingly valuable to the crypto ecosystem and it is for this reason that their restriction or their limitation by government regulators could pose a significant opportunity to the Terra (LUNA) ecosystem.
Let’s put that into context. On November 1, the President’s Working Group on Financial Markets (PWG), along with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, issued a “Report on Stablecoins” that provided background on stablecoins, identified regulatory gaps related to such digital assets, and offered recommendations for addressing those.
Put simply, U.S. regulators say issuers of ‘stablecoins’ should be policed like banks.
However, according to CoinDesk a delegate for DeFi platform MakerDAO said that the report only applies to fiat-redeemable stablecoins, referring to footnote 5 of the document which states:
“Stablecoins that are purportedly convertible for an underlying fiat currency are distinct from a smaller subset of stablecoin arrangements that use other means to attempt to stabilize the price of the instrument (sometimes referred to as “synthetic” or “algorithmic” stablecoins) or are convertible for other assets. Because of their more widespread adoption, this discussion focuses on stablecoins that are convertible for fiat currency.”
Accordingly, Ran Neuner’s narrative seems logical. Once (not if) the regulators slap regulation on fiat-backed centralized stablecoins it is not unreasonable to suggest that we will see a migration toward seigniorage supply or algorithmic stablecoins that are decentralized and use smart contracts.
Here are two videos that really cut the mustard if you want to take a deep dive on stablecoins and Terra UST in particular. Do Kwon, Founder and CEO of Terraform Labs, flashes it out at a level of detail that is easy to understand.
The foundational idea that makes cryptocurrencies the most interesting is the idea of a truely decentralized currency. Underpinning all the different applications and superior blockchain technologies that we have built is the idea that we can seperate state from money. Government regulated stablecoins wrapped in tedious disclosure requirements sound more like TradFi to me — perhaps a nifty FinTech operation at best.
The narrative is simple: A decentralized economy requires decentralized money that governments can’t f*ck with. Period!
MakerDAO, which is a collateral-backed cryptocurrency soft-pegged to the US dollar, might check the box in the decentralized money department. However, the big question that is looming around this project is wheather Dai will be able to handle thousands or millions of transactions per second? Do Kwon and others would certainly suggest that MakerDAO is not scalable. The jury is out on this one so let’s keep it moving.
I am extremely bullish on Terra UST winning the stablecoin race. The thesis is simple: Once U.S. authorities regulate fiat-backed stablecoins and slap red tape onto their usage, we will see a flight into decentralized stablecoins. Currently, the value of the top 3 fiat-backed stablecoins is +/- $120 billion USD. Who is going to eat their lunch?
Jose Macedo from Delphi Digital supports this narrative. In fact, he has written an in-depth thread about it all and probably explains it much more eloquently than I could ever do. Be sure to check it out here. Read it once, read it twice, Bob’s your uncle— mazel tov!
The Bullish Case for the Terra (LUNA) Ecosystem
Stablecoin regulation aside, the beauty with Terra (LUNA) is that it has a very vibrant community #LUNAtics and a growing ecosystem. Terra’s plan for mass-user adoption has certainly gained a lot of traction in recent times.
Accordingly, it is no coincidence that many macro heavyweights, such as Raoul Pal, Cathie Woods, or Mike Novogratz have joined the Terra (LUNA) bull party. Raoul Pal, for example, has discussed Terra in the context of Metcalfe’s Law. I have written a whole Medium post on this so be sure to check it out.
Mike Novogratz, on the other hand, is having some fun with it. I will leave it for you to figure out what “Pisco high” means.
On a more technical side of things, Terra (LUNA) is also firing on all cylinders. For instance, Columbus-5 successfully launched in late September and, according to the network’s developers, Terra’s ecosystem is on the verge of an explosive expansion.
Do Kwon notes in this regard that “now that Columbus-5 is live, more than 60 projects are preparing to launch in the next six to eight weeks and more than 100 have recently announced plans for the end of the year or early 2022.”
Latest map & projects also available http://terra.smartstake.io/eco (reload site if needed).
Meanwhile, the integration of Inter-Blockchain Communication (IBC) protocol, is set to open Terra up to a myriad of dApps in the Cosmos (ATOM) ecosystem while enabling Terra UST to seamlessly hop between chains.
Do Kwon explains that the “wormhole is a cross-chain bridge to Solana (SOL), Ethereum (ETH), and Binance Smart Chain (BSC), that enables Terra assets like UST to be seamlessly ported to some of the largest chains by TVL and users in the entire industry.”
Here is the grand kicker, as a result of more projects being launched on Terra, the demand for UST will increase accordingly. This will lead to a decrease in the supply of LUNA (due to the inverse relationship between LUNA and UST to keep the price UST at $1).
“More projects on Terra diversify and amplify the demand for UST, accelerating the expansion of the stablecoin supply and accruing value to LUNA holders,” Do Kwon
Okay, it is time to wrap this up. I am actually suffering from information overload at the moment. In fact, I have just fallen in a deep Terra rabbit hole so it is going to take a while to take it all in.
In summary, my attempt to learn about Terra (LUNA) has answered many questions but also opened a rabbit hole that I am eager to explore. Terra’s ecosystem is breathtaking so I invite you to go to jump onto their website at Ecosystem | Terra Docs and start exploring.
Happy exploring ya’ll.
Frei Bier / Twitter: @FreiBIER13
DISCLAIMER: My writings are merely a reflection of my learning journey and my attempt to compartmentalize the cryptoverse. I am learning out loud so feel free to correct me or disagree with me. This is not investment advice but my hope is that you find value in some of my links and ideas.