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DeFi Deep Dive: Terra-Luna

In the hyper competitive world of DeFi, one standout of this bull run is Luna and the Terra ecosystem behind it. Terra is a decentralized algorithmic stable coin that is able to mint digital pegs to virtually any world reserve currency and is backed by their reserve token Luna.

The Luna token has been one of the top performers of the cycle as a whole, leaving many in the crypto world in awe. It’s recent local top landing at $22.30 on March 21, 2021 which was a whopping 8000% rise from it’s lows in June of 2020. In the same time period comparatively, Ethereum is only up 1600%.

What could be causing this meteoric rise you may wonder? Was there some major partnership that pushed them to liftoff? Take a dive with us and let’s find out together.

History

Terra Luna was launched in April of 2019 on the Cosmos blockchain. The initial offering was at a price of $0.19 and ranged between that and $0.30 for much of it’s early months. The Founder and CEO of their parent company TerraformLabs, Do Kwon, has been working on the ecosystem since January of 2018 alongside Co-Founder, Daniel Shin.

Kwon has been seen on CNBC in 2019 discussing the origins of his blockchain being centered around the idea that digital asset should only increase in price as long as it is innovating and creating value for its users. This mantra seems to be coming to life as we continue to look into this ecosystem.

Tokenomics and funding

In regards to their initial fund raise, there was no public ICO, they had a multi-round private sale of the LUNA token between $0.16 and $0.80 that raised somewhere in the ballpark of 72 million dollars. These private sales were funded by major players: Binance, Huobi, OKEx, plus some venture capital firms.

Data on this token raise and also on the distribution of tokens upon launch is murky at best with estimates of the sale being between 210 million to 385 million Luna being sold to these firms prior to launch which would be ⅕ or ⅓ of the total 1B supply. Twenty-six percent was owned by the initial investment firms, 20% was locked with the Terra Alliance, and most interestingly only 4% of supply was made available on exchanges.

Given the centralization on launch, it remains a question as to the current decentralization of supply, specifically with regard to regulations.

What does it do?

Luna is the reserve currency of the Terra ecosystem that has 3 main use cases.

  1. Receiving rewards from Terra transaction fees sent directly to the Terra Station wallet.
  2. Continual burning of Luna for UST to provide stability to the stablecoin ecosystem, making the 1:1 ratio as perfect as possible.
  3. Incentivizing blockchain validators.

Luna can also be leveraged through dapps within the Terra ecosystem (e.g., Mirror and Anchor). As adoption of the stablecoin ecosystem increases, so does the price of Luna all while Luna is burnt to mint new stables as well. The target industry for Luna is obviously Decentralized Finance to take on the Centralized Banking system through innovation and tokenomics that incentivize people to engage with their ecosystem.

DAPPs, DAPPs, and more DAPPs

Mirror Protocol

Mirror Protocol mints synthetic assets that are pegged at a 1:1 ratio of the real life asset. People can gain exposure to Apple, Tesla, AMC, and Gamestop without having the risk of a centralized entity like Robinhood limiting their trading abilities. These synthetic assets are minted by collateralizing 150% of their worth in UST.

The usage of Mirror Protocol is directly correlated to the burning of Luna tokens as more UST is minted to interact in the protocol. People can also provide liquidity to the pools of any asset on the platform and get handsomely rewarded in APY. On top of that, Luna stakers are weekly airdropped MIR tokens that can be instantly staked in MIR governance that automatically compounds your rewards at a variable APY that has been well over 20% as of late.

With over 2 billion in Total Value Locked (TVL), Mirror has been a value capture masterpiece for Terra and Luna.

Anchor Protocol

Anchor Protocol is a savings/lending/borrowing platform that allows users to stake their UST to receive a stable 20% APY in their savings account. They are the first to offer a stable APY in the crypto space and we are interested to see how this plays out in a bear cycle. This incredible yield is carried out through their unique liquid staking mechanism where people can take out UST loans by collateralizing their Luna through minting bLuna.

Since bLuna earns staking rewards and is used as collateral by the borrowers, Anchor Protocol liquidates the rewards earned on bLuna to pass the rewards on to UST depositors. There is also a governance mechanism for users to stake their ANC tokens that are also weekly airdropped to Luna stakers.

There is quite a lot of confusing staking in this ecosystem but at the end of it, the users are the winners if they play their cards right and do not over-leverage themselves in borrowing against their Luna or UST holdings. Luna stakers are even rewarded daily in Chai app usage rewards which is a payment app similar to Venmo built on the Terra network that currently has 2.2 million users in South Korea.

As intense as this all sounds, the mechanisms behind it are much more complex and will be even more so as more decentralized apps are built on the platform.

Future growth projections

The rollout for future Luna Terra projects and integrations is absolutely massive as one can tell from the chart provided below. To name a few of the upcoming standouts we have: Alice, Ozone Insurance, Mars Protocol, Angel Protocol, Loop Finance, Kash, Saturn, Nebula, Lido, and Spartan.

Each innovation adds usage of UST and Luna and some come with weekly airdrops to Luna stakers. Over the course of this year, it is quite possible that Luna stakers will be receiving an airdrop or multiple airdrops every day of the week on top of every other earning mechanism already described with each new protocol offering more layers to earn and protect wealth.

The Luna community is currently listed as the number 7 DeFi protocol for deep social engagement. In this ranking, the only Top 100 coins by market capitalization that are higher than Luna are Chainlink and Sushiswap. Not bad company to be in if you asked us.

The Bottom Line

The Terra Luna ecosystem is continuing to prove itself as a force to be reckoned with bringing their own brand of DeFi, renamed as ‘TeFi’ by their community, to the cyptosphere at a time when copying others rather than leading by innovation is capturing the headlines.

Despite their questionable token launch, they have worked hard to prove that their ecosystem is not only usable, but it is unique and user friendly. Unicorns in this space do not come around often but when they do, it is time to take notice. The Terra Network has put the traditional banking system and federal reserve in a tough spot as it is showing the world what a system that benefits all users and not just the top that everyone can win together.

We look forward to the future of this ecosystem as it is a value capture gift for anyone willing to take it.

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Jared Gabaldon

Jared Gabaldon

Principal for R.F. Capital - Decentralized Finance Fund