A truly decentralized world needs decentralized money. Currently, decentralized finance (DeFi) is underpinned by centralized stablecoins. This is a point of failure that could have a cascading effect on the entire decentralized ecosystem of applications that use DeFi as a liquidity backbone. Terra was created to provide an alternative to centralized stablecoins and its protocol has grown to become the #2 largest blockchain by total value locked.
What is Terra?
Terra is a multi-dimensional protocol that’s not only a stablecoin protocol but also a layer-one blockchain that developers can build decentralized applications on. Terra was created by the team at Terraform Labs, founded by Do Kwon and Daniel Shin in 2018. Do Kwon is the current CEO at Terraform Labs.
The Terra protocol is a public blockchain protocol for creating decentralized algorithmic stablecoins. Decentralized algorithmic stablecoins are tokens that are pegged to an asset, in this case fiat currencies. The price peg is maintained via rules set in code and not by being backed by the underlying asset. Non-algorithmic stablecoins such as USDT and USDC are backed by an equivalent sum of USD or USD-like assets.
Currently, Terra supports the creation of stablecoins for 22 currencies that range from major currencies such as USD, GBP, JPY to smaller currencies such as SGD and MNT. Users are able to swap the LUNA token for an equivalent value of stablecoins and vice versa. Swapping LUNA for a stablecoin burns LUNA, resulting in a deflationary supply. Likewise, swapping UST for LUNA burns UST. For example, if 1 LUNA = $50 USD, swapping 1 LUNA will produce 50 UST (TerraUSD) and burn 1 LUNA.
This creates an arbitrage opportunity for users whenever UST decouples from its USD peg. In such situations, users are incentivized to do swaps in the direction of arbitrage, maintaining the peg.
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Users swap LUNA for UST whenever 1 UST > 1 USD and sell the UST for USD, earning the difference. In the reverse situation (1 UST < 1 USD), users swap UST for LUNA, essentially buying an equivalent amount of LUNA for less than its USD value.
Terra Station Swap Interface
The Terra blockchain is a proof-of-stake layer-one blockchain built using the Cosmos’s software development kit (SDK). It uses the tendermint consensus as its consensus mechanism. Once a validator proposes a new block, two rounds of voting by the other validators occur to decide on whether to accept or reject the proposed block. A two-third majority of ‘yes’ is required for a block to be accepted. If it is rejected, another validator is chosen as a proposer and the process is repeated. The validators are rewarded with the transaction fees generated from transactions in the block. Proposers are given a larger reward for their extra efforts.
The current mainnet supports up to 130 validators, ranked by the number of LUNA tokens they have staked in their validator pool. Hence, the last validator acts as the barrier to entry to be a validator in the network. The larger the pool the more likely it is to be chosen as a proposer and the more rewards it gets. Holders of LUNA are able to delegate their tokens to the pools of their choosing and receive rewards proportionate to their stake. Staking LUNA allows you to vote on or submit your own governance proposals. Staked LUNA has an unbonding period of 21 days and holders do not receive rewards during that period. The Terra blockchain is open to the public and other protocols are able to build on top of it should they wish to do so. Rust is the coding language used for the Terra ecosystem, similar to that of Solana.
Daily active addresses on Terra have been on a gradual uptrend, peaking at 51K on 9 March and currently ranging between 30-35K. Number of daily transactions are on a similar gradual uptrend and hit an all time high of ~690K on 9 March.
Benefits of Terra Blockchain
There are three main benefits of the Terra blockchain: Speed, low fees and interoperability.
Speed and fees
By using the Cosmos Tendermint consensus mechanism, Terra is able to achieve high transactions per second (TPS) while maintaining relatively low fees. It’s projected that it can handle up to 10,000 TPS and most transactions on the chain cost less than a dollar. By comparison, Ethereum handles ~15 TPS and transactions cost ~$9. The total number of transactions on Terra hover around 50% of Ethereum’s total transactions while gas fees paid are 0.2% - 0.6% of that paid on Ethereum.
Being part of the broader Cosmos ecosystem allows projects on Terra and Terra itself to interact with other projects within the Cosmos ecosystem via Cosmos’s Inter-Blockchain Communication protocol (IBC). Currently, Terra is able to interact directly with popular protocols such as Osmosis, Juno, Secret network, Sifchain. In the future, interoperability will increase and Terra will be able to communicate directly with every protocol in the Cosmos ecosystem.
Outside of the Cosmos Ecosystem, Terra has bridges to Ethereum, Harmony and Solana.
Terra IBC between zones
**Note that the “Future” screenshot is the current look if every zone is enabled and is just an illustration of Terra’s increased interoperability in the future
Terra has a rapidly growing ecosystem, with over a 100 projects expected to launch in 2022. There’s a heavy focus on DeFi applications, giving rise to the term: TeFi (Terra Finance). As of writing this article, Terra has the second highest total value locked at $22.48B and has grown by 54% in the past month. UST’s market cap sits at ~$14B and has grown ~25% in the past month. Unlike EVM compatible chains that attract existing protocols on Ethereum to integrate on to their blockchains, a vast majority of the protocols that launch on Terra are native to the blockchain. The sheer number of Terra native projects being built and the ability to attract large amounts of capital at this early stage is a testament to the quality of the ecosystem.
The 3 most active protocols by number of users and number of transactions are Anchor Protocol, Astroport, TerraSwap. Here’s a brief description on what each of them does:
Anchor Protocol: Aims to be the benchmark for stablecoin yields, think traditional banking deposit accounts but with much higher APY. Hovers around 19-20% APY on UST.
Astroport: Aims to be the core DEX/AMM for the Terra ecosystem that facilitates swaps between all assets on Terra, think Uniswap combined with Curve.
TerraSwap: The first AMM on Terra, similar to Uniswap. The core difference being that TerraSwap does not allow users to freely list tokens or create pools.
Terra has a focus on making blockchain technology accessible to the masses, even if they aren’t aware of it. Payment applications such as Chai (Asia), Kash (Europe) and Alice (America), aim to fill the same space that current digital payment solutions such as Cash App and PayPal occupy. These protocols have similar front end user experiences as traditional digital wallets but are powered by the Terra blockchain in the backend and users are typically unaware they’re even using a blockchain based system. Chai is the most established among the three and has processed over $6B in transactions for over 2,200 merchants.
Beyond DeFi, Terra has an emerging NFT and gaming ecosystem being built as well. Coming in just below Mirror Finance under number of transactions, RandomEarth is Terra’s main NFT marketplace. Galactic Punks are the largest collection on Terra and will likely be the profile picture most commonly seen amongst LUNAtics (Fans of Terra). Gamevil, a gaming publisher most known for Summoner’s War, has partnered up with TerraForm Labs to build out a gaming and NFT ecosystem.
Every blockchain has to have a good wallet to allow users to interact with applications and have self-custody over their tokens. In Terra’s case, they’ve built their own wallet and a dashboard called Terra Station, for users to interact with core features of the protocol. The dashboard provides insights on key metrics for the LUNA token and the various stablecoins such as staking yield and on-chain transaction volume.
What does the future hold for Terra?
The growth and improvements in interoperability within the Cosmos ecosystem will have spill-over effects onto Terra. As more protocols get built out using the Cosmos SDK and leverage on IBC to enable interoperability, the number of protocols that Terra is able to interact with increases. Cross-chain bridging to other blockchains via protocols such as Wormhole will continue to add support for more chains and allow interaction amongst supported chains.
Increase in overall liquidity and number of potential users benefits Terra tremendously. Not only will applications on Terra get used more often, Terra stablecoins such as UST gets used more often as well. Every chain and exchange that adds support for native UST brings UST one step closer to becoming the decentralized medium of exchange in crypto.
The TeFi ecosystem will continue to expand with the launch of more applications in the coming months and years. More quality applications increases liquidity in the ecosystem and bolsters the overall strength of TeFi. Applications are created to fill gaps or solve issues that exist in other applications. This leads to a more holistic DeFi experience as an end user and increases confidence in the broader Terra ecosystem. Examples of this include WhiteWhale, which is a protocol that empowers retail investors to help UST maintain its peg and insurance protocols such as Nexus Mutual, that offers Anchor protocol depositors insurance on their deposits. Terra’s payments protocols such as Chai, will continue to drive real world adoption and usage of the Terra blockchain and the various stablecoins.
NFTs and gaming on Terra is an area to keep an eye on as well. Having a partnership with Gamevil is a sign of things to come and we’ll start to see gaming and NFT ecosystems getting built out in the coming months.
Terra was founded with an ambitious goal of revamping money to supercharge decentralized economies. Its dApp ecosystem and the LUNA token presents itself as an interesting opportunity for investors to gain exposure to both an emerging layer-one blockchain and the growth of decentralized stablecoins. The rate at which dApps on Terra are growing and the underlying need for a decentralized currency has placed UST in the leading position in becoming the go-to decentralized stablecoin in crypto. The strong focus on DeFi, interoperability as well as its payment applications have created a strong foundation for future growth from crypto natives and the general public alike. With 100+ new applications expected to launch in 2022, it’s safe to say that we’re only at the beginning stages of what TeFi can be and Terra is a protocol worth keeping an eye on.
Interested in getting overviews of on-chain data on Terra? Our Terra multichain dashboards are publicly available here!