Blockchain Project Review: Terra:7.6 New-Generation Stablecoin

Original article by EVALUAPE

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A. Introduction

New-generation stable coins controlled via algorithm and backed by fiat.

Advantages:

1) The project focuses on the stable coin market, which is the core of blockchain-related business as well as a blue ocean market.

2) The design of the project has sophisticatedly combined stake coins and stable coins, forming a closed internal loop.

3) The team is composed of members with superb background; it has also partnered with a number of powerful e-commerce companies to attract more users.

Disadvantage:

1) The key factor affecting the project’s success is the quantity of users. But the project is barely able to achieve any long-term goal with its current user base.

2) The roadmap is unclear. There is no sign that the GitHub is open source.

3) There are not many participants in the project’s community.

B. Industry

As a bridge connecting the blockchain world and the real one, stable coins have always attracted wide attention and been considered the best bond between digital currencies’ attribute as a payment method and its high volatility. At the early stage of the blockchain industry, most stable coins are used for settlement within the exchanges. But a game changer appeared in 2017. After the big success of Tether’s USDT — a stable coin based on Bitcoin and Ethereum blockchain, the market witnessed the appearance of a large number of eye-catching stable coin projects in the following year. At present, there are mainly three types of stable coin projects in the market, the main difference of which is the way to stabilize the coin prize. The first type refers to the stable coins backed by fiat assets, like USDT and GUSD. The second type refers to non-collateralized coins like Basecoin and Carbon money, the quantity of which is adjusted via algorithms. The third type refers to the stable coins collateralized with other cryptoassets via smart contracts, such as MakerDao. In this case, the project will adopt a variety of hedging strategies to reduce the risk brought by the high fluctuation of cryptoassets. Currently, fiat-collateralized stable coins are the most dominant ones. However, this kind of assets tends to be cumbersome. In addition, it can be hard to audit the assets collateralized. All this leads to the fact that the majority of the market is casting them away. The crypto-collateralized stable coins rank second by market cap, mainly thanks to the stable performance of MakerDao. The project successfully survived several extreme situations and redemption crisis, winning more and more users each time. On contrary, so far, there is no representative project of non-collateralized coins, whose development is lagging behind.(7.5/10)

C. Mode

As a stable coin project, Terra will issue cryptocurrencies each backed by distinct fiat currencies and integrate them to an SDR. Users can conduct cross-border transaction and international trading settlement in this pool, while the TerraSDR offers shared liquidity and macroeconomic fluctuations. In addition, the highlight of this project is that it has created another cryptocurrency Luna and developed a set of PoS mining system for Luna. First, the Luna stake represents the pro-rata odds of generating a Terra block, while mining rewards come from the Terra transaction fees and will be denominated in TerraSDR. Secondly, Luna alleviates the price fluctuation of Terra. When TerraSDR’s price is either higher or lower than 1 SDR, users can exchange one SDR for a SDR’s worth of Luna or a SDR’s worth of Luna for 1 TerraSDR for the purpose of arbitrage. To survive the traditional business cycle, Terra learned from Taylor’s Rule to cope with the fluctuation of mining rewards value by dynamically adjusting the transaction fee rate and reserve ratio. To conclude, the project plans to issue two tokens — Terra and Luna. Terra will not be used in fundraising as an asset pegged with fiat assets, so Luna will assume this responsibility. After the project being launched, Luna holders will be rewarded part of the Terra transaction fees via a PoS mechanism.

In addition to the stable coin system, Terra also intends to build a Dapp platform, to ensure the growth and sustainability of the project. Just like how the financial policies are used to stimulate economy, Terra’s Dapp platform will reduce the transaction fee to some extent while grant certain amount of funds to some good Dapp projects. Luna holders will vote to accept or refuse the funding application of a project. The amount will be determined by smart contracts, with parameters like the increase in transaction volume and the size of active users. Generally speaking, the platform aims to solve the practical problems for users and increase the wide adoption of Terra, in order to improve the GDP of Terra economy.(8/10)

D. Technology

It is quite innovative for the project to have cryptocurrencies pegged respectively with different fiat currencies by using blockchain technology. On one side, the adoption of oracles can guarantee the accuracy of exchange rate during the transfer. In Terra, Luna holders can receive some part of the transaction fees as dividend for mining. Miners can vote for what they believe to be the current exchange rate in the target fiat asset. Some amount of Terra is rewarded to those who vote within certain standard deviation of the elected median. Those who voted outside may be punished via slashing of their stakes. On the other side, Terra stabilizes the price by countercyclical mining. When the price of a currency pegged with certain assets deviate from the path, the system will normalize the price through repurchasing or mining rewards dilution, which is similar to how central banks adjust price levels by absorbing or increasing liquidity.

As for the development progress, the project has not published any plans about its GitHub or roadmap so far. (7/10)

E. Team

The two co-founders are both experienced entrepreneurs. One is the former CEO of TMON — the project’s main partner, with a bachelor’s degree from the Wharton School and nearly two years of experience at McKinsey. The other founded a wireless network startup and received a bachelor’s degree from Stanford University. As for the two researchers for stable coin, one is an associate professor at Harvard Business School, the other owns years of experience at the Federal Reserve Bank. Other members are all from well-known world-class universities. The profiles listed on the website are consistent with those on LinkedIn. The team of Terra is superb.(8/10)

F. Ecosystem

Terra has done well in terms of its cooperation with e-commerce companies. It has partnered with Korea’s №1 e-commerce platform TMON and is also negotiating with other companies. Users will be able to purchase online with virtual currencies. However, Terra’s communities on the social networks are quite unremarkable. It has 4,382 members in the Telegram group, 998 followers on Twitter and 196 members on Discord. The project should pay more attention to this part later.

G. Conclusion

The core of Terra’s cryptocurrencies is to construct a “central bank” via algorithms, smart contracts and etc., in order to gain control over cryptocurrencies pegged with fiat assets. The hybrid design of “stake coin + stable coin” stabilizes the price of stake coin at a reasonable level and enables users to receive dividends by holding stake coin. In addition, the stake coin can further serve to secure the reserve, so as to support the release of stable coins. Different from fiat-collateralized stable coins like USDT, the design of Terra is undoubtedly ingenious. In comparison with coins simply pegged with one asset, Terra’s stable coins have improved the level of decentralization. When there are sufficient transaction fees, it will be able to completely cover the cost of decentralization mechanism and its risk compensation. However, when the transaction fees run short, the whole ecosystem will also come to a standstill. To solve this problem, Terra has established a Dapp platform and partnered with a well-known Korean e-commerce company TMON. The real problem here is that whether the current cryptocurrency users will be able to support the platform. Besides, despite the novelty of Terra’s economic model, there are also some problems. When certain individual or group holds over 51% of the total Luna tokens, this person/group will be able to control almost all the voting, which is similar to a 51% attack in the blockchain world and can cause destructive damage to the whole ecosystem.

Hype Score: Medium High

Risk Score:Medium

Expectation:Medium High

Total Score: 7.6

All information in this article is provided for reference only and does not constitute investment advice.


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