Terra – The Ultimate Innovation of the DeFi Sector

In December 2021, Terra surpassed Binance Smart Chain (BSC) and became the second-biggest blockchain for DeFi protocols in terms of total value locked in (TVL). Overall, UST’s market capitalization increased from $180 million at the beginning of 2021 to over $15 billion in March 2022, while the price of LUNA increased 138-fold. According to DeFiLamma, as of April 2022, Terra’s DeFi ecosystem includes 26 dApp with over $30 billion in TVL. What accounts for Terra’s popularity? Why is it accelerating its growth in the extremely competitive DeFi market?

What is Terra (LUNA)?

Terra (LUNA) is a blockchain technology to develop decentralized financial infrastructure and generate algorithmic stablecoins. Terra enables you to earn interest on stablecoins, effortlessly spend crypto at shops, and completely replace most of your banking requirements with one smooth DeFi protocol.

Terra’s fundamental concept as a stablecoin platform is accomplished via an ingenious seigniorage methodology that reduces volatility while maintaining a tight fiat currency peg. On the other hand, Terra does much more than just issue stablecoins. Additionally, it is a smart contract-enabled blockchain home to a flourishing DeFi ecosystem linked to the Cosmos ecosystem through the Cosmos IBC protocol.

A Brief History of Terra

Terra was created in January 2018 with the primary goal of accelerating cryptocurrency adoption by providing digitally-native assets that are price-stable versus the world’s main fiat currencies.

Daniel Shin and Do Kwon launched Terra to increase blockchain and cryptocurrency acceptance, emphasizing price stability and usability. Kwon was appointed CEO of Terraform Labs, the parent firm of Terra. Besides, Kwon formerly worked as a software engineer for Microsoft and Apple before creating and leading Anyfi, a firm that provides decentralized wireless networking solutions.

Shin co-founded Ticket Monster (a significant South Korean e-commerce site) and Fast Track Asia before founding Terra, which is a start-up incubator working collaborating with entrepreneurs to construct fully functional enterprises.

Terra DeFi Platform’s Potential

Terra’s objective is to mainstream cryptocurrency payments and build a vast ecosystem that unifies banks, credit networks, and payment gateways into a single open system. Terra feels stablecoins are critical to accomplishing this mission because they are capable of two things:

1. Maintain purchasing authority

2. Enable straightforward, low-cost payment methods

Due to the global nature of cryptocurrencies, sustaining buying power implies something different to various individuals and economies. The US dollar is excessively unpredictable for some, while others see it as a safe haven. This is why the present hegemony of stablecoins such as USDT and USDC is unsatisfactory.

As a result, Terra developed a technique for issuing regional stablecoins that are also readily traded. Besides, Terra also has a cross-chain technology that connects Ethereum, Avalanche, Juno, etc.  Furthermore, Terra stablecoins are not backed by United States dollars, South Korean won, or any other fiat money. Rather than that, Terra releases cryptographically secured algorithmic stablecoins. These stablecoins are tied to the dollar using a circular dual-token structure that enables seigniorage arbitrage possibilities.

Exploring LUNA & UST

Luna (LUNA) and TerraUSD (UST) are two Terra network native currencies. Terra is a blockchain-based technology created in South Korea by Terra Labs.

Terra protocol’s native cryptocurrency is $LUNA, which is used to collateralize the processes that ensure the price stability of Terra stablecoins, regulate validator incentives, and act as a voting power for network governance. $LUNA is a collateral asset that is staked to ensure the integrity of Terra mechanisms, hence ensuring network security.

Terra’s stablecoin monetary policy is endlessly expandable, enabling DeFi applications and protocols to operate at their full potential. Additionally, TerraUSD and other Terra stablecoins share liquidity, meaning UST may be traded on-chain for KRT (and vice versa) with zero transaction costs.

In addition, TerraUSD, as well as other Terra stablecoins, may earn stable returns using Anchor, a savings protocol that offers predictable annual percentage rates (APRs) backed by block rewards from top proof-of-stake blockchains.

How Terra Works

Terra’s smart contract platform was constructed using the Cosmos SDK, which is well-known for its compatibility across chains. Terra also connects to other blockchains, like Ethereum, Avalanche, Harmony, and Osmosis, enabling the frictionless movement of data and tokens across non-native ecosystems.

Terra employs the Delegated Proof-of-Stake (DPoS) consensus mechanism dubbed “Tendermint,” in which token holders may delegate their cash to certified validators — individuals or groups of persons that run validator software, for securing and adding new blocks of transactions to the blockchain.

It operates in a manner comparable to that of a House of Representatives or Parliament in politics. LUNA token holders (similar to citizens) can allocate their coins to validators (the representatives), so the more coins they delegate (votes in an election), hence more power they acquire to propose new blocks of transactions, vote on their validity to earn rewards, and also participate in the blockchain’s governance. 

Validators oversee the operations of the Terra network using a software called full node, which verifies the blockchain’s transactions and blocks. Terra Core is the software they utilize, and complete node validators must run the newest version of it without experiencing any latency or outages. Additionally, they maintain the price of Terra stablecoins by arbitrating any departure from the peg and voting on network development ideas.

Overall, one validator’s voting power is weighted by the total quantity of coins delegated to them to stake, along with their own coins, which means that those with the largest stake pool have a greater chance of introducing a new block to the chain in return for staking rewards from transaction fees. 

Terra Ecosystem’s Dynamics

Within the Terra ecosystem, users may always exchange LUNA for UST and vice versa at a fixed rate of $1 – regardless of the market price of either token at the moment. This is significant because it implies that if demand for UST increases and its price exceeds $1, LUNA holders may earn a risk-free return by exchanging $1 of LUNA for one UST token (which, in this case, is worth more than $1 owing to increased demand).

During the exchanging procedure, a portion of the LUNA is destroyed (removed from circulation forever), and the remaining is put in a communal treasury. The treasury’s funds are then utilized to invest in apps and services that enhance the Terra ecosystem’s value.  The total amount of tokens in circulation decreases by burning a proportion of LUNA tokens, making them rarer and, hence, more valuable. By increasing the supply of UST tokens, the current supply is diluted, reducing the total price back down to its $1 level.

Similarly, suppose the demand for UST is minimal, and the price falls below $1. In that case, holders of UST may trade their tokens 1:1 for LUNA, which is more valuable due to its scarcity, allowing the user to make another risk-free profit.

Major Component of Decentralized Finance

According to Terra’s whitepaper, the creators’ objective was to achieve Bitcoin’s goal: a peer-to-peer electronic payment system. Terra does this via the use of stablecoins – cryptocurrencies whose value is tied to various assets, such as commodities or fiat currencies.

Currently, as the second-biggest player in the DeFi realm, Terra is closer than ever to achieving the goals established only four years ago. Terra’s long-term goal is to replace banks, credit networks, and payment systems such as PayPal with a single, seamless, and rewarding blockchain experience. In the future, people will leverage Terra to purchase and sell goods using digital currencies stored in blockchain-based mobile phone wallets.

Merchants will recognize multi-fiat stablecoins that will be automatically switched on-chain and behind the scenes. Additionally, you will earn interest on the idle currency by storing it in Terra DeFi apps, similar to how you might rent out empty condo space on AirBnB.

How to Buy Terra (LUNA) ?

Investors or DeFi users who wish to buy LUNA either as a form of investment, send funds, or use any of the dApps built on the Terra network, can find LUNA in many popular Centralized Exchanges such as Binance, Gate.io or Kucoin. Furthermore, someone can find LUNA on many Decentralized Exchanges such as Astroport, Osmosis or Terraswap.

How to Buy TerraUSD (UST)?

Anyone who wishes to purchase the popular stablecoin of Terra, TerraUSD (UST), can do so in almost every Centralized Exchange, such as Coinbase, Binance, Gate.io, etc. In addition, UST is also paired with other cryptocurrencies in many Decentralized Exchanges such as Astroport, Osmosis or Terraswap, and Stableswaps, such as Curve Finance (multi-chain) and Platypus Finance (Avalanche).

Innovative DeFi protocols in the Terra ecosystem

Terra Ecosystem. What is Terra
Terra Ecosystem – Source: Terra Official Website

Moving forward, Terra is leveraged to power some of the most powerful protocols in the DeFi sector.

Anchor Protocol

Anchor Protocol is a decentralized savings program that utilizes the UST stablecoin to deliver decentralized savings services. In March 2021, the protocol was introduced. Anchor is Terra’s flagship app, with the ecosystem’s biggest TVL. In the Anchor protocol, there are two types of services: savings and lending. Anchor compensates depositors for keeping their cash separate from borrowers who charge interest on the amount borrowed. Additionally, anybody borrowing money through Anchor must provide collateral in the form of a crypto asset if they are unable to repay the loan.

Mirror Finance

Mirror Finance is a DeFi system that enables the purchase of physical stock assets using mAssets (Mirrored Assets) such as mGOOGL, mNFLX, and mAMAZON. The protocol provides access to the stock market and the ability to purchase them using cryptocurrency in a decentralized manner. Additionally, since Mirror Finance makes use of a pooled liquidity structure, orders placed inside Mirror Finance time are quickly executed.

Terra Swap

Terra Swap is a decentralized exchange protocol (DEX) for the Terra ecosystem currency that also acts as an automated market maker (AMM) in a similar fashion to Uniswap. You may swap your LUNA or UST tokens for other Terra ecosystem tokens like ANC and MIR using Terra Swap. Terra Swap, is one of the most popular DEXes in the Terra ecosystem, with current TVL of $400 million. Additionally, you may join one of Terra Swap’s liquidity pools as a liquidity provider (LP). These pools have the potential to generate enormous APRs of up to 3-digit percent.

Bottom Line

Overall, Terra’s self-adjusting monetary supply processes are one of a kind in the industry. As a result, the initiative exemplifies the revolutionary spirit of the decentralized finance sector. Terra is already well-known among traders, and the network’s worldwide adoption continues to expand.

Terra and its ecosystem dApps, are currently making strategic alliances with other networks such as Polkadot and Avalanche. Terra in collaboration with Avalanche, are planning to build a Gaming blockchain using the revolutionary technology of Avalanche Subnets. While Terra’s Anchor protocol, after the successful deployment on Terra and Avalanche ecosystems is planning to deploy on Polkadot’s Acala network.

Aris Ioannou
Aris Ioannouhttps://coinavalon.io
Aris created Coinavalon with the purpose of helping the average person navigate the decentralized web. Aris has been passively in the space since 2017 and full time since late 2020. Before Coinavalon, Aris worked as a Business & IT Architect in the financial services sector. Aris holds an MSc in Advanced Computing from Imperial College London, a BSc in Computer Engineering from University of Cyprus and currently pursuing an MBA degree from CIIM.

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