Terra’s LUNA Stays Close to $100 ATH, with $26B+ TVL So Far
The Terra (LUNA) ecosystem continues to outperform the presently stagnant crypto space. Over the last year, Terra has surpassed all expectations, becoming the closest layer 1 blockchain contender to Ethereum with $26.45 billion TVL.
Terra Displaces Alleged ‘Ethereum Killers’ like Solana and Avalanche
Terra’s 12.16% DeFi market share displaced many previous would-be ‘Ethereum killers’, including Solana, Avalanche, Fantom, and BSC, by a significant margin.
Furthermore, following Do Kwon’s announcement that Terra’s UST stablecoin will be backed up by $10 billion worth in BTC on March 14th, its top algorithmic stablecoin is inching to replace Dogecoin (DOGE) by market cap. As of this Friday, on March 18th, the non-profit organization based in Singapore, the Luna Foundation Guard (LFG), already raised $1 billion in OTC token sales to establish a forex reserve for the UST stablecoin, denominated in Bitcoin.
Overall, in over a month’s time, TerraUSD’s (UST) stablecoin market cap increased by 36%, going from $11.23 billion on February 1st to $15.27 billion on March 18th. This placed UST just behind DOGE’s $15.59 billion market cap at rank 14. In the meanwhile, Terra (LUNA) is at seventh place by market cap, just behind XRP (XRP), at a $31.6 billion market cap.
Interestingly, both XRP and LUNA are projects aimed to displace international payments systems. However, because UST is an algorithmic stablecoin tied closely to LUNA, the latter mirrors its substantial growth.
What’s so Special About Terra’s Ecosystem?
Founded by the South Korean programmers Do Kwon and Daniel Shin, Terraform Labs launched the Terra Blockchain in 2018. However, it took Terra until March 2021 to creep over the 1% DeFi TVL (total value locked). From the get-go, Terra was envisioned as a platform for hosting stablecoins in order to become a global payment network.
In the last couple of years, South Korea’s FinTech market was instrumental in pushing it forward. Specifically, the South Korean decentralized payment app CHAI using Terra’s infrastructure has received $120 million in total funding and serves over 25 million users. The end goal is to establish a merchant payment system, with less than 0.5% transfer fees, in which stablecoins for multiple fiat currencies are automatically swapped on Terra’s chain.
On top of that, Terra offers dApps just like Ethereum but is drastically more affordable. The idle stablecoin cash can then be locked inside Terra’s Anchor protocol, serving as a high-yield savings account, paying exponentially more in interest than any traditional bank account.
Therefore, Terra offers several immediately apparent advantages:
- More efficient payment system, as demonstrated in real-world application on a mass scale by the CHAI app.
- Fast, near-zero fee payments in addition to bank replacement for holding cash.
- Avoidance of anxiety associated with crypto volatility, by focusing on stablecoins.
The last point is critical, as Terra’s UST is not just any stablecoin.
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Terra’s Algorithmic Stablecoin UST Explained
Thus far, it has become apparent there are three pathways to creating a stablecoin, as the all-important bridge from fiat to crypto. The likes of USD Coin (USDC), managed by Circle and Coinbase, and Paxos (USDP) are both highly regulated. Meaning, their reserves are properly collateralized and auditable by federal agencies so there is no danger of a bank run.
Then, there is the dubiously backed Tether (USDT). As the still largest stablecoin with an $80.4 billion market cap, Tether’s reserve is poorly audited to such an extent that Tether’s representatives even failed to appear at the Congressional hearing on stablecoins.
Lastly, there are algorithmic stablecoins, representing the native blockchain ecosystem by being collateralized by other crypto assets instead of fiat currencies. In the case of TerraUSD (UST), it uses Terra’s native LUNA to maintain its peg to the dollar.
Specifically, UST is fed through oracles from a basket of fiat currencies stemming from the International Monetary Fund’s Special Drawing Rights (SDR), the IMF’s unit of account created in 1969. Using this TerraSDR basket of fiat currencies, Terra’s LUNA tokens collateralize them through a burning mechanic.
- If 1 TerraSDR is under 1, a TerraSDR is converted to 1 SDR worth in LUNA tokens. This causes the TerraSDR supply to decrease, which elevates the peg back to a 1:1 ratio.
- If 1 TerraSDR is over 1, an SDR is converted to TerraSDR. This causes the TerraSDR supply to increase, which brings the peg down to a 1:1 ratio.
Therefore, as an algorithmic, smart contract-based stablecoin, TerraUSD (UST) doesn’t need any physical (institutional) collateralization. Instead, everything is done on-chain through Band oracles that feed the fiat currency price to smart contracts.
As you might guess, this is highly appealing to crypto investors who appreciate native blockchain solutions over centralized gateways. Moreover, traders engaged in this constant stablecoin arbitrage gain rewards regardless if LUNA token supply diminishes or expands.
Do you think all algorithmically controlled stablecoins are a better idea than centrally-controlled ones? Let us know in the comments below.