The Terra Columbus-5 mainnet has arrived!
Following the successful migration of Columbus-4 to Columbus-5, Terra’s boldest and most significant mainnet upgrade since the inception of the Terra protocol is now officially live.
Col-5 unlocks numerous dimensions for the Terra ecosystem to better capture value, port assets across chains, and set the foundation for a vibrant TeFi economy. Below, we walk through some of the major highlights of Columbus-5, including the plans for executing IBC via an on-chain governance vote.
We can break down the post into 3 primary sections:
- The Economic Changes
- The Community Pool + Ozone
- IBC & Stargate
The Economic Changes
Many of the most notable changes to the Terra protocol in Columbus-5 have come from you, the wonderful LUNAtic community. The on-chain community votes over the past several months have been aggregated into a pivotal mainnet upgrade, Columbus-5, that will change many facets of the Terra protocol.
Most notably, this includes the economic changes induced by Columbus-5’s restructuring of Terra economics mechanics on the supply side.
Primarily, these fall into 3 buckets:
- Simplifying Treasury Module Logic
- Dividend Swap Fees to Faithful Oracles
- Mempool Prioritization
Simplifying Treasury Module Logic
The treasury module logic in the Columbus-4 Terra protocol defined the weighted allocation of LUNA from seigniorage (i.e., minting UST with LUNA on-chain) based on specific network conditions.
After the “Burn All Seigniorage” proposal, TIP43 directed 100% of the seigniorage to the community pool, which will be burned pending manual proposals in line with the original proposal’s details now that Col-5 is live. TIP44 also diverted the community pool LUNA at the time to a separate contract that will be sent to the burn module account now that the Col-5 upgrade is live. It currently contains 23.45 million LUNA (~$832 million). A separate burn proposal will be manually initiated after the Col-5 upgrade for burning more of the community pool contingent on the governance plans for allocating $1 billion of LUNA in the community pool to bootstrap Ozone since the LUNA amount and value in the community pool has grown significantly since the “Burn All Seigniorage” proposal.
In Columbus-5, and concordant with the “Burn All Seigniorage” governance proposal, the reward_weight parameter in the Treasury Module will be fixed at 1 — meaning that 100% of seigniorage is burned.
The overarching purpose is to simplify the economic design of Terra and augment the value capture of LUNA based on UST’s growth.
- Seigniorage — Minting 1 UST requires burning $1 worth of LUNA — contracting the LUNA supply + expanding the UST supply.
- Contraction — Redeeming 1 LUNA requires burning 1 LUNA worth of UST — contracting the UST supply + expanding the LUNA supply.
As a result, Columbus-5 can be thought of as implementing similar, extreme EIP-1559 (Ethereum) dynamics that burns $1 worth of LUNA for every 1 UST minted. Value capture is amplified by augmenting the per-unit value of each outstanding LUNA due to the downward pressure of scarcity on the liquid supply of LUNA. As the supply of UST continues to expand, driven by emerging and diverse sources of demand, LUNA’s burn rate will accelerate in parallel.
During seigniorage (i.e., expansion of the UST supply), the economic changes of Col-5 create a tighter correlation in demand between UST and LUNA.
As eloquently stated by the Terra Bounty winner, Murray Rudd, in his excellent piece on LUNA/UST price dynamics from a microeconomist’s perspective:
“The elegance of the UST/LUNA design is evident here: every sustained increase in UST demand simultaneously results in the expansion of the LUNA demand curve and contraction of the LUNA supply curve. From a microeconomic perspective, the importance of this unique feature cannot be overstated.”
A continually expanding UST supply magnifies pressure on the LUNA price over time. This is because consistently expanding the demand while contracting the supply is accentuated by the fact that less LUNA will be required to mint more UST as the LUNA price increases.
Marginal shifts outward in the demand curve for UST subsequently have progressively larger impacts on the price of LUNA since the supply of LUNA is diminishing yet still tightly correlated to the demand for UST. Eventually, minting UST would require a minimal amount of LUNA, perhaps even leading to a low-variable supply with a fixed floor for LUNA should UST’s network effects and Terra’s economy continues its trajectory 5–10 years from now.
Image Credit — Murray Rudd — https://murrayrudd.substack.com/p/ustluna-price-dynamics
An abstract way to think of Terra’s supply-side mechanics is the protocol operating as a decentralized on-chain bank (i.e., the Federal Reserve). LUNA holders are the stakeholders in that bank, where increasing UST demand triggers seigniorage, and all the value accrued to LUNA holders via an augmented per-unit value of each LUNA token as the supply consistently decreases.
The protocol’s mechanics also act similarly to open market operations by central banks, with a few explicit exceptions. The protocol’s stablecoin design is intended to help produce counter-cyclical (relative to the exogenous market) incentives for key players (i.e., validators, arbitrageurs) and rapidly reach equilibrium during contractions.
Initially, seigniorage was constructed in previous mainnets in a manner conducive to community ecosystem building. By allocating significant portions to the community pool to be redirected to building applications that source demand for UST, seigniorage would help bootstrap the Terra economy’s growth that envelops UST demand.
However, the social coordination overhead of on-chain governance still tarries behind more traditional fundraising and crowdfunding models.
Complementary initiatives such as Terraform Capital, the $150 million ecosystem fund, the framework of formal grants for the community pool, and community-led programs have emerged organically to replace the original seigniorage allocation design. Consequently, the community voted to provoke much stronger burn effects for LUNA contingent on expanding the UST supply — inducing superior value capture.
By closely tethering LUNA demand to UST demand, LUNA value capture becomes a function of UST’s adoption in a thriving cross-chain, Internet-native environment. As more protocols launch on Terra after Columbus-5, this will accelerate the expansion of the UST supply, reducing LUNA’s liquid supply and accelerating its burn rate.
This is important because increasing demand and liquidity for UST (which is accelerating) will bolster the protocol’s defense against contractionary cycles. Larger contractions of the UST supply will be smaller relative to the overall outstanding supply and liquidity of the asset on multiple chains. As LUNA increases in value relative to the supply increases of UST, less LUNA is required to burn 1 UST since only $1 worth of LUNA is required to mint 1 UST.
LUNA distribution will subsequently gravitate towards stronger hands in the market as weaker hands sell. Selling by minting UST with their LUNA holdings via the on-chain swap amplifies directional supply-side liquidity pressure on LUNA.
Overall, increasing UST demand consequently becomes value-accretive to LUNA holders and stakers at large, with Col-5 introducing a tighter correlation between UST and LUNA demand.
Throw in an amazing community of #LUNAtics evangelizing UST across chains and use cases, and the picture of how UST adoption may eventually attach itself to Metcalfe’s Law begins to crystallize. After all, public blockchains are decentralized machines of social and economic coordination, facilitating the transfer of an information primitive — value.
Finally, Columbus-5 implements mempool prioritization on Terra. Mempool prioritization is a transaction ordering logic update that will initially give priority to the oracle votes from validators in blocks on the Terra chain. This has multiple benefits.
First, mempool prioritization for oracle votes means that oracle votes, which are critical to maintaining a functioning protocol for UST issuance at correct prices, will never be barred from blocks because they’re pushed out the mempool during periods of extensive transaction flooding. One such instance occurred during the May crash when pending liquidation transactions from Anchor squeezed some oracle votes out of blocks. It won’t occur again.
Second, mempool prioritization paired with the new Mantle release (Terra’s equivalent of Infura on Ethereum) will help to alleviate the stress on applications on Terra should network traffic surge. Instances like IDO sales and extreme volatility in collateral on money markets are both common origins of network overloads.
Network congestion with mempool prioritization can be eased considerably.
Dividend Swaps Fees to Faithful Oracles
In Columbus-4, a dynamic percentage of LUNA from generated seigniorage was diverted to a rewards pool. The distribution of the pool went to validators that produce accurate oracle votes within a tight reward_band from the elected median of stablecoin oracle votes distributed over 1 year. This encourages accurate oracle voting from validators — a critical function of the supply-side protocol mechanics.
Since Columbus-5 burns 100% of the seigniorage, validators will not receive seigniorage revenue from the rewards pool moving forward. Columbus-5 compensates for this reduced cash flow to validators by dividending swap fees instead of burning them.
Swap fees on Terra will be redirected to validators and delegators based on the same oracle price accuracy metrics, increasing LUNA staking yields to 7–9% or more. The previous incentives for validators to submit accurate oracle price votes are transmitted into swap fees instead of the rewards pool.
The added benefit is that LUNA staking will become more appealing with higher yields, meaning that it’s likely Columbus-5 will gradually induce an even higher percentage of staked LUNA (currently around 34% of total supply), reducing the liquid supply of LUNA further. Airdrops from dozens of projects planning to launch after Columbus-5 will also bolster staking yields, cementing staking as a long-term bet on the Terra economy’s success.
The Community Pool & Ozone
Since 100% of LUNA is burned in Columbus-5, no more seigniorage will be diverted to the community pool. Currently, the community pool contains roughly 98.675 million LUNA, equating to approximately $3.5 billion at the time of writing.
$1 billion (in LUNA) from the community pool will be burned via the on-chain swap (LUNA → UST) to bootstrap Ozone. Ozone is an algorithmic, claims-based insurance protocol approaching launch on Terra. That leaves approximately $2.5 billion in the community pool at current prices.
Ozone is currently undergoing an audit and is expected to launch in mid-late October.
Obviously, the LUNA price has changed significantly since the original proposal. Many community members have been asking about the community pool’s usage for Ozone, which will be clarified soon as Ozone finalizes its audit and prepares for launch. The plan for $1 billion denominated in LUNA remains, but the specifics of how its execution will follow soon.
Please stay tuned for the initiation of Ozone comms, specifically regarding the community pool as it relates to bootstrapping the protocol.
IBC & Stargate
Terra is built on the Cosmos SDK, meaning that it exists within an ecosystem of application-specific blockchains utilizing Tendermint consensus. One of the most distinguishing features of Cosmos is IBC — a standardized communication protocol for blockchains that are IBC-compatible. The Cosmos SDK comes with IBC natively, which is disabled by default in Stargate (the latest major SDK upgrade) and needs to be manually initiated.
As a result, IBC functionality on Terra will go live following an on-chain governance vote after Columbus-5 is live and stable. Once the network is stable and ready to unleash the gates of interoperability for UST and other Terra assets, a governance vote to manually initiate IBC on Terra will be published. More updates about the plans for the IBC governance proposal will be released shortly after Col-5.
An intuitive way to think about IBC was relayed earlier this year by the team at Paradigm Research, in the essay “A Cosmos Thesis.”
The authors explore the design, including advantages and disadvantages, of shared state machine blockchains for smart contracts (e.g., Ethereum) relative to Cosmos, relating them to the early emergence of computing and the Internet. In particular, they compose the argument that Ethereum and other shared state machines are akin to mainframe computing in the 1970s, with emergent developments in interoperability unveiling the potential of an “Internet of blockchains.”
Shared state machine blockchains reconcile consensus across all applications and transactions in the network using a shared security model.
The benefits are that all transactions on Ethereum are imbued with the robust underlying security assurances of layer one consensus — eliminating much of the resource overhead that weighs so heavily on decentralized security in DeFi. However, the rapid uptake of Ethereum and the thriving development environment creates a “metropolitan-type” environment of high fees, pushing users to L2s and other L1s.
Comparatively, Cosmos was built with interoperability baked in as a first principle. IBC is a general communication standard for Cosmos chains (natively part of the Cosmos SDK) and can even be implemented on other blockchains with consensus finality. Asset transfers, data availability proofs, and more can all be seamlessly ported between IBC-enabled chains.
Notably, application-specific chains in Cosmos don’t natively share security like on Ethereum. Instead, they operate as independent “sovereign” chains part of an interconnected ecosystem of chains.
Returning to the mainframe analogy, IBC can be thought of as unlocking an environment of independent networking servers — the basis of the Internet. Except, they’re application-specific blockchains transmitting value. This is a powerful conceptual analogy.
IBC holds the ability to connect a blossoming ecosystem of application-specific blockchains. For Terra, the immediate impact of IBC means opening Terra’s gates to the Cosmos Hub, Secret Network, Akash, ThorChain, and any future IBC-enabled chain. For UST, this is extremely promising.
UST liquidity can flood into emerging protocols like Osmosis on the Cosmos Hub, solidifying early network effects as the primary stablecoin for IBC. IBC is a powerful cross-chain conduit, but is still nascent and missing a key primitive of DeFi — a highly liquid and portable stablecoin. TVL and trading volumes of DEXs and other DeFi protocols on Cosmos chains stand to immediately benefit from UST flowing into them.
One interesting analog of UST once IBC is live is Secret UST (sUST), an anonymous, wrapped version of UST on Secret Network, which is a true form of digital cash native to the Internet. The potential for sUST is enormous, and as a portable inter-chain, private stablecoin, it may come to manifest as a strong locus of demand for UST serving a unique subset of privacy-oriented users.
Additionally, stablecoins are the preferred medium of exchange for users, particularly yield farmers porting capital between apps or users bridging across chains. Should UST become the most liquid and useful IBC stablecoin, most inbound cross-chain stablecoin capital to the Cosmos will likely intermix with UST at some stage. As the adoption of Cosmos accelerates and more appealing yield farming opportunities emerge, we expect UST demand to grow in parallel.
All of the potential highways of IBC for Terra extend the tendrils of demand for UST to new ecosystems and communities with unique use cases and circumstances.
The robustness of UST’s demand surface is augmented as a result.
More diverse sources of demand for UST, whether it be a front-running resistant AMM on Secret or a base pair pool on Osmosis, not only increase the demand for UST but help distribute its liquidity. In the long run, this means gradually reducing the concentration of UST’s outstanding supply in the hands of a few protocols (e.g., Anchor aUST), dampening downward reflexivity to the peg, and removing the concave risk of dependence on a small group of protocols.
The design space for programmability between IBC-compatible chains is tremendous. It can also reveal some fascinating economic metrics to track as they apply to UST.
For example, measuring the velocity of UST on Terra relative to other chains that are IBC compatible.
Which chains and apps on those chains have stickier liquidity or lower token velocity and why? Where is the bulk of UST liquidity flowing and recycling once the highways of IBC are pulsing through Terra? What takeaways can be drawn from UST token velocity on IBC compared to Wormhole? Is IBC superior to other bridge implementations for specific use cases? If so, which ones?
Flipside Crypto has already been exploring ways to gauge such cross-chain economic metrics for UST as alluded to above, and we’re excited about what’s in store for Terra.
IBC is a significant feature extension of the Terra ecosystem, one that carries sharp upside potential in the long term. It makes Terra a premier hub of inter-chain activity in crypto, unleashing a new theater of data analytics and liquidity coursing through a diverse Cosmos ecosystem ready to explore.
Looking to the Future of Terra
Columbus-5 is the culmination of years of hard work and dedication by a thriving community of developers, users, partners, investors, and LUNAtics of all varieties. It’s a momentous step for the network and one which we couldn’t have imagined happening with the current vigor of fanfare and support just a few months ago.
Columbus-5 is just the beginning. It lays the foundation for future waves of apps, protocols, builders, and users to onboard into the TeFi ecosystem — wielding the power of decentralized money that is more attractive to spend and more attractive to hold than fiat incumbents.
From the May crash to today, it’s been one helluva ride. Welcome to the beginning of the future of Terra, courtesy of Columbus-5.
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