Terra & UST Cheatsheet

Easy Terra Luna Guide

Terra was one of the first few blockchain projects I studied and so much has happened! I find that everything everywhere was TLDR so I shall try to summarise key points and thoughts.

What first attracted me to it was:

1. Its mission — to create a decentralised stablecoin (digital currency pegged to fiat) that has mass adoption
2. Anchor protocol (I’ll get to it later, basically supercharged savings account with c.19.5% yield)
3. Do Kwon’s (one of the founders) Twitter — super smart and highly entertaining
4. Massive growth — in terms of TVL (total value locked, how much $$ is in the ecosystem), developers, LUNA, and its stablecoin UST’s market capitalisation. Its market capitalisation is around $21.6b and it is ranked 11th.

So obviously a very promising project — in which I’ll deconstruct below.

What is Terra?

• Founded by Daniel Shin and Do Kwon in 2018
• Proof-of-stake blockchain that creates a network of decentralized algorithmic stablecoins. It utilizes a dual-currency algorithm with its native coin LUNA to ensure each UST (TerraUSD) is pegged 1:1 with USD. This means, if it depegs from $1, traders can earn a risk-free profit via arbitrage illustrated below.

• Built by Terraform Labs (South Korea), which operates the blockchain and maintains the peg
• Developed by Luna Foundation Guard (Singapore), a non-profit organization dedicated to growing the Terra ecosystem
• Raised USD33m in 2 token sales and hundreds of millions thereafter. It attracted US$150m in funding in July 2021 for its ecosystem from a handful of major crypto investors, including Arrington XRP Capital, Pantera Capital, Galaxy Digital, and BlockTower Capital.
• Mainnet went live in 2019 and can currently process 5000 transactions/second (versus Ethereum’s 15 transactions per day)

Credit: https://terra.smartstake.io/eco

Anchor Protocol

The Anchor Protocol is the flagship dApp (decentralised application) on Terra (and basically what got me started as well). This article is an excellent deep dive for more detail.

• A lending protocol that allows you to deposit your UST for borrowers, at an insane stable savings rate of about 19.5%, currently comprising 55% of Terra’s TVL . Essentially a bank on steriods
• Maintains the yield by 1) interest paid by borrowers of UST 2) staking yields from the collateral deposited by borrowers (and typically overcollateralised) 3) a yield reserve that contains any surplus
• Main risks being 1) smart contract vulnerabilities 2) loan liquidation if you are using it to borrow funds 3) the high 19.5% yield may go down in the event there are not enough borrowers 4) the stablecoin depegs from being 1:1 from the USD
• I am aware there have been recent concerns of its yield reserve being depleted, but the purpose of a yield reserve is to maintain the yield during market cycles where leverage is down (for example, a “crypto winter” ). If it completely depletes, Do Kwon has also given guidance that Anchor will simply self-sustain like a money market, with 15–16% yields. (which is very attractive still!)
• And if you are paranoid, you can always take up insurance on the smart contract hacks, de-pegging of UST etc
• In my humble opinion, Anchor is an excellent starting point for crypto beginners who want a taste of stable, high yields as compared to traditional finance

Recent Developments

So far there have been so many positive developments that point towards Terra’s strong fundamentals —

• Terra had its Columbus 5 upgrade to its mainnet, which resulted in LUNA being more deflationary and Terra being integrated with the Cosmos ecosystem
• Chainlink oracle integration — external pricing data feeds are now integrated via Chainlink and developers can build dApps using this pricing data. FYI oracles link external off-blockchain data to the blockchain.
• Proposal to burn 89million LUNA in community treasury (USD4.5B) was completed to fund Ozone, their insurance application.
• Chiron Partners launched a US$50m Terra fund
• Binance listed UST — so more liquidity and adoption!
• UST was launched on NEAR protocol — even more liquidity with the integration of the NEAR ecosystem!
• Travala (a crypto-friendly travel agency) has integrated UST
• Formation of LUNA Foundation Guard which provide grants for open source projects, educational Terra content, and community growth (super excited about this, as I am a strong believer of dedicated resources to grow the community)
• dApps grew from < 10 to more than 150 in a year

Roadmap

• Do Kwon has hinted at a partnership with the South Korean Government — which will potentially increase the adoption of the stablecoin
• Partnership with Transak (fiat-crypto payment gateway) for UST is going to launch in the US
• Current ongoing proposal to sponsor a major American sports league, first of its kind for the industry! Edit: This has passed and Terra is now officially a Washington Nationals sponsor for 5 years! I’m so psyched for this, imagine you can use UST at the venue!
• Increasing integration not just with the Cosmos, NEAR ecosystem but Avalanche as well

Thoughts & Key Takeaways

Ending off with some of my thoughts to organise myself…..

1. Strong growth fundamentals: Terra is going into 2022 in a position of strength with all its various partnerships and use cases which will only increase the adoption of UST. This means LUNA supply will decrease
2. Improved tech: Many tech upgrades have been completed that will enable developers to deploy dApps more easily. This will only serve to grow its ecosystem
3. Team: Impressive team — I’ve stalked many of the senior guys on LinkedIn (many Ivy leaguers, top VC/tech talent) It appears that Terra has been attracting a lot of developer talent as well!
4. Fund-raising: Terra has a lot of financial resources! They completed a massive fundraise last year with top crypto names, and their community treasury stands at US$2.7B
5. Valuation: This is just a ball-park metric, but a quick glance at its MarketCap/TVL ratio does indicate it is on the lower end..
6. Great mission: This is more of a personal reason why I love Terra and resonate more with it as their mission is aligned with my passion to elevate the investment community. And they aren’t elitist about it too, wanting to educate all investors, and not just crypto-heads

Conclusion

So is Terra (LUNA) worth investing in?

I thought of an easy decision-making framework to evaluate an ecosystem/coin’s fundamentals:

1. Will the coin maintain value? In this instance, I believe so, especially with its dual currency monetary policy — with increasing UST adoption, more LUNA will be burned (meaning, decreasing its supply), which will increase its value
2. Are there use cases with the coin? Yes as the native coin, as the ecosystem grows you’d need LUNA or UST to transact in Defi projects, buy NFTs etc.
3. Is there long-term growth potential? In my very humble opinion yes! The very fact that Terra is making inroads getting mass adoption of its stablecoin makes me very positive about this.

So Terra checks all boxes.

This is not financial advice, I am simply advising myself. I am a holder of LUNA and I use Anchor Protocol.