What is Terra, the Fastest Growing Cryptocurrency in the Top 25?
Terra and its UST stablecoin are part of a blockchain project aiming to be the backbone of the global payments system. Through their Anchor Protocol and Mirror Protocol, they are able to act as a decentralized bank offering higher yields and lower fees. Their upcoming update, Columbus-5, will lead to greater efficiencies and scarcity for LUNA.
For the past year, DeFi has been promising to be the next generation of banks by removing the middleman and offering greater yield opportunities for users. A lot of the use in DeFi comes from stablecoins, which are coins that are pegged 1:1 to another asset, typically the US dollar. Most large stablecoins are centralized, meaning there is a registered entity that holds the collateral for the stablecoin, ensuring that it keeps its peg. Though this is a simple solution, it creates many problems, as the centralized company behind a stablecoin can effectively control who holds it and what it can be spent on, which makes them no better than our current payment solutions. Terra and the UST stablecoin are combating this issue, and its fast adoption is why Terra’s LUNA coin is up nearly 500% in less than a month.
Terra was created by Do Kwon and the Korea-based Terraform Labs. The Terra blockchain mainnet released in April 2019, and uses LUNA as its native cryptocurrency. In some aspects, Terra resembles smart contract blockchains like Ethereum, as it allows for smart contracts to be created and deployed on the Terra blockchain. However, it also has an incredibly unique and exciting feature that sets it apart from other projects: the UST stablecoin.
UST is a decentralized algorithmic stablecoin, meaning it does not have a 1:1 backing with real US dollars. Instead, it uses the LUNA coin as an algorithmic stabilization method. Anyone can mint UST by burning their Luna, so burning $1 of LUNA will create $1 of UST. This also works in the reverse direction, so $1 of UST can be burned to create $1 of LUNA. This inherently ties the two coins together, and makes the success of LUNA rely on the adoption of UST. The more UST is minted, the more LUNA is required to be burned, which means there is less supply, leading to a price increase.
The UST stablecoin, which was released in late 2020, already has a market capitalization of over $2 billion. Since its adoption is the main driver of LUNA growth, the Terraform Labs team has been focusing on increasing its adoption through a number of methods, mainly through bridges to other blockchains. UST can be found on Ethereum, Polygon, Solana, Binance Smart Chain, and soon-to-be Polkadot. The Terra blockchain was also built using the Cosmos SDK, which means it will soon be interoperable with the entire Cosmos ecosystem.
UST is not only being used in traditional DeFi activities such as liquidity provision on Uniswap, but there are also revolutionary DeFi applications built on the Terra blockchain. One of these is Mirror Protocol, which is the largest synthetic stock protocol with a total value of nearly $2 billion. Using Mirror, anyone can provide UST as collateral to mint a stock, such as Apple, Tesla, or even GameStop. They can then use this stock, which is pegged to its real-world price through the use of oracles, as they would any other cryptocurrency token.
Another exciting protocol being built on Terra is Anchor Protocol, which calls itself the “Gold Standard for Passive Income on the Blockchain.” This protocol allows users to deposit UST and receive a stable 20% annual percent yield. This high yield is accomplished by leveraging the staking rewards from multiple blockchains, including Terra, Ethereum, Solana, and Polkadot. Anyone can deposit these cryptocurrencies into Anchor, and then the coins’ yield is used to achieve this interest rate.
One exciting update coming to Terra on September 9th is the release of Columbus-5, the next upgrade to the Terra blockchain. The main feature that users are excited about is the burning of LUNA transaction fees, which now go to the Terra community treasury. This will have a similar effect to what EIP-1559 did for Ethereum, and will be another method by which the LUNA supply will be continually shrinking. It will also enable even more interoperability with top blockchains, furthering the influence of UST.
Terra holders have a lot to be excited about over the coming months, which has been reflected in recent price action. The main risk in holding LUNA is if there is some sort of unforeseen event that causes the UST peg to break, or a lack of adoption of UST. However, as more blockchains and exchanges adopt UST, this risk becomes less probable, and UST comes closer to its goal of being the backbone for the global payments infrastructure.
By Lincoln Murr