Terra is currently one of the most popular Decentralized Finance (“DeFi”) blockchain protocols that have gained huge traction in recent months. Terra offers a very interesting stablecoin concept and growth roadmap to allow for the mass adoption of their cryptocurrency, and I am bullish about Terra and its underlying native crypto asset, LUNA. This article explores the growth potential of the Terra ecosystem, diving into the CHAI payments platform, Mirror, Anchor and a brief overview of the future protocols that are within Terra’s roadmap.
What is Terra?
Terra is a blockchain protocol that was founded in January 2018 by the co-founders of Terraform Labs, Daniel Shin and Do Kwon, with the singular vision of bringing about the mass adoption of cryptocurrencies. Terra supports stable programmable payments and open financial infrastructure development. It is supported by a basket of fiat-pegged stablecoins which are algorithmically stabilized by its native crypto asset, LUNA.
The tokenomics behind the Terra stablecoin
The most popular Fiat-Collaterized Stablecoins such as Tether (USDT) and USD Coin (USDC) are pegged to the U.S. Dollar and are able to achieve their peg through maintaining a sum of dollar in reserves that is equal to the amount of USDT/USDC in circulation.
Terra, on the other hand, is an algorithmic stablecoin where the cost of minting equates to the face value of the stablecoins minted. The key piece to the puzzle as to why Terra stablecoins can maintain their fiat-peg is due to LUNA — the governance token in Terra’s Proof-of-Stake blockchain.
According to Terra’s white paper, whenever Terra deviates from its peg, this creates an arbitrage opportunity for the Terra payment network participants to take advantage of, and LUNA is either minted or burned to enforce the peg for any Terra stablecoin. This process allows the arbitrager to benefit from Terra’s deviations out of the peg and ensures the price stability of the Terra stablecoin.
Putting it into context, whenever TerraUSD (The USD-pegged stablecoin) goes above $1USD, $1 worth of LUNA must be burnt to mint 1 TerraUSD, which expands the monetary supply of TerraUSD, bringing it back down to its $1 peg.
The investment thesis for LUNA
The beautiful thing behind Terra’s tokenomics is that as Terra gets more widely adopted, there is a linear relationship to how the LUNA token grows.
Since LUNA is the stability mechanism behind the Terra stablecoin, it means that LUNA is a deflationary currency system. The maximum amount of LUNA is 1 Billion LUNA that was issued at genesis. As the demand for Terra stablecoins grows, the circulating supply would only reduce over time.
Therefore, LUNA is essentially an asset that captures the value in a very synchronized way to the growth of the Terra stablecoin — this presents a moonshot opportunity to believers of the Terra ecosystem that are HODLing onto the LUNA token. Simplistically speaking, as the demand for Terra stablecoins grows, more and more of the LUNA supply would have to be burnt, which effectively drives the value of a single LUNA token up.
“Hold up, but if there is no sustainable demand for Terra’s stablecoins, doesn’t that mean that the LUNA token would effectively be worthless?”
That’s true. Going back down to earth, to understand the potential value of LUNA, it is key to analyze the levers behind Terra’s growth and its user acquisition roadmap.
Who are the users and how has Terra grown since 2018/19?
Analysis of the growth potential of CHAI, Mirror Protocol, and Anchor Protocol
TerraKRW (KRT) and TerraUSD (UST) stablecoins have seen exponential growth since their inception. The demand for KRT has largely been contributed by CHAI, while the demand for UST has been largely contributed by Terra’s recently launched Mirror and Anchor Protocol. I have decided to analyze how CHAI, Mirror, and Anchor Protocol have been able to generate demand for UST, and a light touch on their growth potential from here onwards.
CHAI
CHAI is a Seoul-based payment tech startup founded by Daniel Shin in 2019. and it is one of the fastest-growing e-wallet platforms integrated across multiple e-commerce merchants in Korea.
The adoption of the KRT stablecoin was largely driven by CHAI’s expansion into Korea’s growing digital payments market. This integration between KRT and e-commerce merchants was made possible through CHAI. Any payments made through the CHAI e-wallet or debit card would be routed through the Terra blockchain.
A quick walkthrough of how CHAI integrates with Terra’s KRT:
- Alice connects her bank account with CHAI and creates a CHAI e-wallet
- Alice performs purchases a product on TMON e-commerce platform and pays using CHAI
- CHAI uses her KRW and purchases KRT on her behalf
- CHAI sends Alice’s KRT minus the transaction fees to the TMON merchant
An interview between Tokenist and Do Kwon further revealed that users of Chai are never actually exposed to interfacing with Terra directly. Hence this allows the user interface is smooth and conducive to mass adoption.
The digital payments market in Asia is highly fragmented, to analyze the growth potential for CHAI and the underlying KRT, I decided to take a look at CHAI’s user acquisition and merchant acquisition strategy as these are two of the key success factors for any digital payments platform.
1. CHAI’s user acquisition strategy
CHAI leverages on a gamified rewards platform to acquire users. The CHAI e-wallet and CHAI debit card enable users to earn instant cashback promotions at popular brands. CHAI previously stated that they have spent $0 on marketing from their balance sheet as all promotions were run and funded via the economics behind seigniorage. Terra is able to reinvest economic growth (growing demand in KRT) to provide ongoing discounts to consumers. In periods of growth, this eventually results in a virtuous feedback loop for the demand for KRT— Growth results in seigniorage, which is used to fund discounts, that drives further adoption.
CHAI e-wallet platform has experienced strong growth since its inception in June 2019. Currently, it has more than 2.4 million users, a key number that has more than doubled over the past year.
Daily Transaction volume on CHAI has been on a general uptrend as well.
In terms of daily active users, CHAI is currently ranked #4th across all blockchains dApps on dapp.com, with a DAU of 78k.
While I was not able to get data on the longer-term transaction growth and net user retention ($), I decided to take a look at CHAI’s Apple and Google App Store ratings as a proxy for stickiness and general user sentiments. Most of the comments were very positive, largely praising the App’s clean UI and the very attractive discounts and cashback that a CHAI user can get.
CHAI has also integrated with Samsung Pay in Korea, which further allows for the ease of use of the CHAI card across merchants.
The overall growth of CHAI’s user base certainly looks promising. CHAI has been able to acquire a strong and consistent user base within its payments platform. One area of concern is the slowing pace of growth of its Daily Active Users. However, this number is expected to grow as the company strives for expansion into Thailand, Taiwan, and Singapore. It would be interesting to see CHAI’s strategy to gain market share within other Asian markets.
2. CHAI’s merchant acquisition strategy
CHAI integrates with merchants and e-commerce companies with an API called I’mport, which allows online merchants to accept payments from over 20 options, such as traditional debit and credit cards, wire transfers, digital wallets, including CHAI’s e-wallet and debit card.
So why would a merchant accept CHAI payment over other forms of payments such as PayPal and venmo? CHAI has 2 very clear value proposition for merchants — faster settlement times (Traditional payment services 7 days compared to 6 seconds which is the average block time within terra blockchain) and lower transaction fees, through bypassing existing settlement networks to cut down fees from 2.7–3.3% to 0.5-1.5%.
This value proposition seems to have been effective for Terra to acquire new merchants. According to TechCrunch, as of December 2020, CHAI is currently used by >2,200 merchants in Korea, including Nike Korea and Philip Morris Korea. In a March 2021 AMA with Do Kwon, he mentioned that CHAI currently has a top-heavy strategy and the payment flows largely comes from 45–50 large merchants (Large convenient chains such as CU, e-commerce platforms such as TMON).
While there is a lack of publicly available data on the net retention rate of CHAI’s merchants, the value proposition of CHAI over other digital payments seems really attractive for merchants to accept CHAI as a form of payment.
Additionally, looking at the growth of the overall e-commerce and digital payments market, both of these are set for strong CAGR growth in Asia. Terra’s merchant acquisition strategy to capture a bigger piece of the growing market adds to the bullish thesis.
Mirror Protocol and Anchor Protocol
Both Mirror and Anchor Protocol deserve article write-ups of their own, which I will be posting in the near future, but here is a quick summary of these 2 DeFi protocols that have been built on the Terra Ecosystem.
TerraUSD (UST) was publicly introduced in Sep 2020. The demand for UST has seen exponential growth when Mirror Protocol, a decentralized synthetics protocol for on-chain price exposure to track real-world assets, was launched in December 2020. To put it simply, Mirror assets are synthetic assets that reflect the price activity of real-world assets such as stocks, futures, ETFs, and other traditional financial assets. Mirror aims to solve the problem of the lack of access to global financial markets and gives traders anywhere in the world open access to price exposure without the burdens of owning or transacting real assets. In the March AMA with Do, he mentioned that a large proportion of Mirror users are currently from Thailand, China, and Indonesia — areas where access to US equities is very restricted.
Mirror has seen a 100% M-o-M liquidity growth from December 2020 to date with >20k Daily Active Users and has seen an average daily trading volume of >50M UST.
Anchor Protocol was subsequently launched by Terraform Labs in March 2021. Anchor is a savings protocol that offers low-volatile yields on UST deposits. The attractiveness lies in the fact that users can earn 20% yields (APY) on their UST stablecoin just by depositing within the Anchor platform. Yes, low volatile 20% yields. In the current climate of extremely low interest rates, this makes savings within Anchor very attractive.
20%… but how?!
Terraform labs came up with an ingenious economic model behind Anchor, which leverages on over-collateralization of borrowers' loans and staking the collateralized assets to earn staking yields to finance the cost required to pay depositors (on top of earning the borrowers’ APR). Collateralized assets would be liquidated whenever the Loan-to-Value ratio goes above 50%. What about ensuring a constant stream of borrowers? Anchor also has incentivization mechanisms in place to incentivize borrowers to borrow using Anchor’s platform, with the mid to long-term goal of making the Anchor ecosystem self-sustaining. I will be going further in-depth into the economics behind Anchor in a subsequent post.
The current total deposited asset value in Anchor is sitting at $240M UST deposited, and $217M UST borrowed with a collateral value of $728.21M UST. As it stands, Anchor has accumulated over $900 million in TVL just within 5 weeks of launch. (Note: TVL value varies accordingly to the price of the total collateral value)
Anchor’s long-term goal is to become the “Stripe for Savings” for mainstream users. It would be interesting to keep track of Anchor’s commercial partnership which may be an indication of greater growth. Multiple projects such as Orion Money and Tiiik Money are currently being built to further bring Anchor to the masses.
Looking at the growth of UST, the supply of UST grew from 11.23M in late November 2020 to 1.9B in April 2021. Roughly $1.9B worth of LUNA has been burnt to mint UST in the past 5 months.
Putting these 3 platforms together we have:
Payments Platform “CHAI” —Making UST easy to pay
Savings Protocol “Anchor” — Making UST easy to hold
Investment Protocol “Mirror” — Making UST easy to invest
It sure is exciting to see how far these 3 platforms can grow.
Terra’s growth roadmap — 2021 and beyond
Can this growth continue? What are the other levers for growth?
The vision of the Terra ecosystem does not end with CHAI, Mirror, and Anchor. In fact, these are just the 1st generation dApps that have been built by the Terraform Labs team. Terra has now transitioned into a platform that empowers and incentivizes community members and developers to build more decentralized finance platforms within the Terra ecosystem.
There is an exciting pipeline of dApps that are currently being developed on the Terra ecosystem:
Incoming new protocols within the pipelines (Non-exhaustive):
- Kash — Platform integrating both Mirror and Anchor
- Ozone — Insurance Protocol for Anchor
- Loop Finance — Automated Market Maker Decentralised Exchange
- Saturn — FIAT Gateway
- Spar — Decentralized Asset Management Platform
- Pylon — Rumoured to be a Multi-purpose decentralized funding platform
- Alice, Nebula, Mars — Capabilities still unknown
Additional Hype:
- Ongoing Delphi Digital Hackathon for Terra currently has 63 projects — each project has the potential to be launched on the Terra ecosystem
- SCB 10X, a holding company of Siam commercial bank, recently started running a staking node on the Terra Station.
- Rumours of Terra stablecoin being utilized as a part of Busan City’s “Token economy”
Who were the early investors of Terra?
Many notable VC crypto funds have invested in Terraform Labs. That being said, most of them probably got a piece of the cap table when prices and valuations were well below current levels.
Terraform Labs had 12 investors in its $32 million seed round in August 2019, led by Binance Labs, Dunamu, Huobi Capital, OKEx
Kakao Ventures, HashKey Capital, and LuneX Ventures funded Terraform Labs across the 2019 undisclosed funding rounds.
In the latest January 2021 funding, Terraform Labs raised an additional $25 million from Pantera Capital, Coinbase Ventures, Galaxy Digital.
Risks
1. Altcoin season is at an all-time high, so is the current hype for LUNA
It is important to understand the underlying risks if you have bought into Terra’s growth story, and are hodling some LUNA. LUNA presents some similar risks as compared to other altcoins — High price volatility, loss of functionality, lack of consumer protection, regulatory issues, etc. Most altcoins are reaching or are at their all-time high (in both USD and Satoshi levels) and the altcoin season index is currently at a high of 90 as well. LUNA has also been extremely hyped up recently by the multiple protocol launches and the Busan rumours.
2. The ability of Terra stablecoins to maintain their peg
There has yet to be a major black swan event to stress test UST’s ability to keep to its peg. There were, however, a couple of highly volatile days in the past few weeks, which the UST managed to hold its peg well — a positive sign. But in the scenario where UST (or other Terra stablecoins) loses its peg downwards, LUNA will have to be minted to stabilize this price, which would, in turn, dilute the value of LUNA.
3. The difficulty in giving LUNA a proper valuation
A contrarian view would definitely take a stab at LUNA’s current valuations. LUNA’s valuation has had a massive run-up since the start of 2021, gaining more than 3000% YTD when it hit its all-time high of $22.30 in March. A traditional DCF valuation based on a conservative estimate of Terra’s future FCF would also put the fair value of LUNA way below its current price (LUNA’s price has moved from $13 to above $19 across the days of writing this article).
But with the pace of growth that Terra is experiencing, it seems to be rather difficult to put a value on LUNA right now. It is already very difficult to accurately project out the number of transactions in Terra’s ecosystem in the next 3 months, even more so for the next few years. If you are interested in an in-depth fundamental valuation on LUNA, Hashed, Rbf Capital, and Block42 have previously done some really good analysis on this. I decided to work backwards from a target market cap for UST, and went from an angle of growth expectations — “Is it sensible for Terra to grow and hit $X of market cap by Y date”.
Drilling into the risk brought about by growth expectations. If growth stalls for CHAI or the other terra protocols, that would certainly hurt UST’s demand and LUNA’s valuation. However, the terra ecosystem is constantly growing — which means that the risk of protocols failing to meet their demand potential is diversified over a larger and growing pool of protocols. Most LUNA believers have a strong conviction that Terra can pull off its growth strategy which would allow for the exponential growth of the UST market cap. Do Kwon has previously provided guidance, that with the protocol pipelines, he foresees UST hitting a $10 Billion market cap by the end of 2021 (UST market cap is at ~$1.9B today). When Anchor was officially launched in March 2021, an average of ~30M UST was being minted per day. The minting of UST has somewhat slowed down in April, averaging around 8–10M UST being minted per day. Doing a simple back-of-the-envelope math, to hit the $10B UST EOY target, this means roughly ~32M UST ($8B/247 days) needs to be minted per day till EOY. This guidance does sound very bullish at the current daily minting rate. But with Terra’s growing community and new protocols incoming, the possibility still stands. I will be keeping track of the UST supply data on smart stake whenever new protocols are released, and in the process, reviewing the feasibility of the EOY UST target market cap.
Flood capital did an interesting sensitivity analysis on the price upside of LUNA based on UST’s market cap.
An additional mitigating factor is that LUNA, unlike other Proof-of-Stake blockchains, is not inflationary. LUNA staking rewards come from fees (Transaction fees, swap fees) that the Terra ecosystem generates as well as the airdrop rewards that you get from other Terra Protocols.
LUNA staking yields = Chai TX fees + “Seigniorage fees” + Swap fees (after Columbus-5) + MIR/Anchor Transaction fees + MIR airdrops + Anchor airdrops + More airdrops in future
Note: “Seigniorage fees” from the current oracles reward pool would be accrue over 3 years instead of the initial 1 year. Future seigniorage would no longer be routed to the oracles rewards pool as well.
Furthermore, as part of the incoming Terra Core Columbus-5 upgrade, it brings about a refined seigniorage distribution model that further tightens the supply of LUNA (All seigniorage generated from burning LUNA tokens will be fully burnt and no longer go to the community pool and oracle reward pool. This means once $1 worth of LUNA token is burnt, none would be routed back to the circulating supply. You may find out more here.)
4. The risk of increments in LUNA’s circulating supply
(This risk is only applicable if you value LUNA’s market cap using its circulating supply. If one values LUNA using its fully diluted market cap, this risk would not be applicable. There has been a debate recently about the transparency of LUNA’s “locked” supply, which Do mentioned he would provide a transparency report in the near future.)
1.Vesting cliffs of early investors/VCs — This means shifting of unvested LUNA supply into the circulating supply. According to Messari, most pre-seed and seed sales have already vested in late 2020, with the rest being fully vested by Q4' 21. This may result in some selling pressure as early investors look to cash out but according to Do in Terra’s telegram chat, he clarified that most early investors have already sold their vested Luna before the latest run-up apart from some diamond hands.
2. Vesting cliffs of Employees and Contributor pools — This pool of unvested LUNA supply would gradually vest from now till mid-2022. While it’s certainly possible for the LUNA vested from these pools to be sold on exchanges, the vesting for employees seems to be done in smaller batches and all the way till mid-2022. This represents a lower risk of a sudden and huge influx of fresh LUNA liquidity to be sold. (There is currently no clear information on vesting schedules. This might be made clear in the transparency report that Do mentioned)
3. Reduction in UST demand resulting in the minting of LUNA — This results in an increment in the circulating supply of LUNA (which were previously burnt to meet the growing UST demand). This risk is mitigated by the strong growth rates of CHAI, Anchor, and Mirror and the multiple protocols that are in the pipelines, all these aim to further drive UST demand.
Conclusion
“A bet on the moon is a simple bet on the growth of Terra stablecoins” — Do Kwon, 2021
I personally think Terra is a very exciting cryptocurrency DeFi project and has a promising future to bring DeFi to the masses. With the massive run-up in LUNA’s valuation, the onus now lies on Terra to fulfil its DeFi growth story. If you believe in Terra’s growth story, then LUNA might be an attractive asset to hold and stake, and in the process, receive LUNA staking yields and airdrops from new protocols (on top of any capital gains (or losses) that you will be getting (incurring)).
This article just covers the very tip of the iceberg of the Terra ecosystem and more analysis certainly needs to be done. Due diligence has to be done for each new protocol set to be released on the Terra ecosystem as well.
Terra has an amazing, active, and fast-growing community. Terra’s telegram channel (Thanks Aayush!) and Terra’s research forum, Agora, have been really useful avenues for me to get clarifications or updates regarding the ecosystem. This strong community has also resulted in many new ideas for the Terra Ecosystem, as evident in the ongoing Delphi Digital Hackathon.
On a final note, mainstream adoption has constantly been a challenge for cryptocurrency and Terra has a massive wall to overcome in order to get its stablecoins into the hands of the masses. Up until 2021, Terra has been valued as a stablecoin facilitating a payments platform. With Mirror, Anchor, and the multiple protocols that are soon to come, the game has fundamentally changed for Terra and it is now positioning itself well across the entire DeFi ecosystem.
I might be totally wrong about Terra and its growth story, it would certainly be interesting to see how things play out a year from now.
Disclaimer: This article is not investment advice, cryptocurrencies are highly volatile assets. Before making any investment decision, do your own research. I am long LUNA.
Useful Links:
Terra
- Website
- Medium
- Discord
- Agora — Official forum for Terra
- White Paper
Anchor
Mirror
Others
- CHAI Scan — Website that showcases CHAI statistics
- Anchor simulator —Simulate returns of different Anchor/Luna staking or LP strategies
- Terra Analytics by Smart Stake — Website with Terra/Luna supply data, airdrop timers, and Terra ecosystem map
- Apeboard.finance — Web App to track your DeFi portfolio
- Terra Bites — Weekly podcast on the biggest updates within Terra’s ecosystem
- How do Terra stablecoins maintain their peg? — a useful article with an in-depth explanation of Terra’s price stability mechanism
- How CHAI’s promotions funded by seigniorage?— a useful discussion on the concept of seigniorage on CHAI’s promotion.
Some Twitter accounts that I follow which are covering Terra / LUNA:
Validators that I am staking with that provide frequent updates on the Terra ecosystem:
Join Coinmonks Telegram Channel and Youtube Channel get daily Crypto News
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