An introduction to some of the newer, lesser known projects in the Crypto and DeFi space

Terra Luna

Introduction

One of the common gripes with the crypto space, in general, is “Well, what can I actually use this for?” If you're someone who has that doubt or have heard that doubt before, you might want to learn more about Terra Luna.

Terra Luna’s goal is to disrupt the digital payments industry, and they have done a fantastic job when it comes to building things that are grounded in the real world. Terra is building a blockchain, a bank, a better savings account, a payment processing system and many more things. But before all of that, the best place to start is by introducing you to UST and Terra's other stablecoins.  

Stablecoins

Terra Luna offer a range of stablecoins. These are cryptocurrencies that are pegged to and backed by assets, in this case, traditional fiat currencies. Terra Luna has stablecoins pegged to the US Dollar, the Euro, Yen, Renminbi. Its most well-known is the stablecoin pegged to the dollar, referred to as UST. They even have a stablecoin for the international monetary fund. These stablecoins can be used for payments, swaps between currencies and cross-border value exchange.

What's the point of a stablecoin?

As memes like this so elegantly point out, the price volatility of Bitcoin has meant that it's pretty difficult to use it to pay for things. This is where stablecoins come into the picture. These coins are designed to be as stable as possible, so they can be used as a medium of exchange, and so that they can be used to park cash as people transfer their wealth in and out of crypto. For example, if I'm invested in some obscure memecoin (Banano is my current favourite) and am experiencing a lot of volatility, I might want to temporarily move some money out. If I convert my money back to USD (fiat currency), that might be quite a hassle, and it would be even more of a hassle if I wanted to convert it back to crypto. Instead, what I can do is put my money into a stablecoin like UST, so it is still in the crypto ecosystem, but I don't have to worry about volatility.

So in theory, I should always be able to exchange 1 UST for 1 dollar. What's interesting about Terra is the way they keep their stablecoins pegged. To keep its stablecoins pegged, Terra uses the Luna token, which is central to the Terra ecosystem.

Luna is not a stablecoin - its price varies considerably- it is a governance and staking token. That means that if I hold Luna tokens, I am entitled to a vote on decisions about the future of the Terra network, and it means I can also stake these Luna tokens and earn a return on them, since as a holder of Luna, I am entitled to my small share of profits made on the Terra ecosystem.

So, back to stablecoins. Terra uses Luna tokens to maintain the pegs for its stablecoins. That means that I can exchange 1 UST for exactly $1 worth of Luna at any time. Right now, the price of one Luna token is around $44. So that means I can exchange 1UST for 1/44th of a Luna token, the value of which is $1.

This bit of detail is for the nerds... you can skip if you want to, but you will need this to understand a key risk to Terra.

So how can the Terra network be sure that 1 UST can always be exchanged for exactly $1 worth of Luna? Imagine that the price of UST has risen, and you can now exchange it for $1.20 worth of Luna. Terra's algorithm will burn (meaning destroy) Luna tokens to create more UST. This will mean the supply of Luna tokens has increased, and economics 101 tells us that when supply goes down, price rises. And on the other side, supply of UST has increased, which means price will go down, eventually back to the level of the peg, so 1UST will be worth $1 of Luna again. If the price of UST falls two low, the opposite mechanism kicks into effect, and UST is burned to create Luna tokens.

Chai

The astonishing thing about the Chai payments network is that it means people are using crypto, without even knowing it.

Chai is a Korean payments network, and you can use it to pay for your coffee just like you would use your Visa debit card. The difference is what's happening in the background. When you pay for your coffee, Chai converts the amount you have paid from fiat currency into Terra's equivalent stablecoin. let's say you paid $4 for a coffee, chai will convert this into $4 worth of UST. This UST is then sent to the coffee shop you bought from, and converted back into normal US dollars. And there we go. Crypto magic happening in the background, and both vendor and customer are none the wiser.

Chai charges only 0.5% for processing payments, which is much cheaper than today’s alternatives. In 2020, the network processed $2 billion in payments and had 2.5 million customers.

Anchor Savings

This part of the ecosystem is so cool that I wrote a separate post about it (here). but for now, I'll give you the tl;dr. Anchor is basically a better savings account. While your current bank savings account gives you pretty much a 0% interest rate, Anchor offers you a 19.6% return on your savings. They are able to do this because of some of the high yields on offer in crypto. They stake your crypto on your behalf and earn the staking returns from multiple proof of stake blockchains (they are making more than 19.6% from staking, and are taking their profit margin for their service). All you have to do is convert some money into UST, set up Anchor savings, and enjoy a 20% annual return on what is a relatively safe investment.

Mirror Protocol

Mirror protocol allows anyone to create assets on the blockchain that track real-world assets. For example, you can buy an asset that tracks Tesla stock using the Mirror Protocol. So why is this useful? Well, unlike actual stock exchanges, this is open 24/7. Secondly, I don't have to worry about international rules and borders. It might be hassle for me to set myself up on the Mumbai stock exchange to buy an Indian car company's stock. It would be far easier for me to trade that same asset on the Mirror protocol.

The Future

There is already a lot of quite impressive things going on within the Terra ecosystem.However, there is much, much more in the pipeline. Below are some, among dozens of projects, of the most exciting things being built on the Terra ecosystem.

Mars

Mars will offer new ways for lenders to receive interest on their money. One major innovation Mars will offer is the idea of reactive interest rates, that change according to market conditions.

Levana

Levana uses Mars to add leverage to Luna. Which means that instead of just buying Luna tokens, I can buy 2x Luna tokens using Levana, which would produce 2x the returns, if Luna tokens were to go up in value.

White Whale

Remember that UST is meant to be pegged to the value of $1 exactly. Well if the peg is briefly above or below $1, arbitragers can take advantage of this to make profit. White Wale allows users to make that profit automatically. So not only is it providing an automated profit to users, it is also outsourcing the maintenance of the peg to users.

The Founder of Terra

"Focus on the founder rather than the product" is common advice in the world of startup investing. If the same advice applies (even in part) to the evaluation of crypto projects, this is a good sign for Terra Luna. Terra's original founder, Do Kwon graduated from Stanford with a degree in Computer Science and took a job at Microsoft. But he found the culture there did not match with his extreme ambition, so he decided to branch out on his own. While Do Kwon was building his startup Anyfi, he started learning more about the blockchain, and what he learned made him shift focus. Kwon and his friend Nicholas Platias began writing a whitepaper spelling out some of the ideas they had in this space. And around that time, they met Daniel Shin...

Daniel Shin was a Korean entrepreneur with some big hits already under his belt. Shin had founded Ticket Monster, one of South Korea's first e-commerce platforms, and later sold it for hundreds of millions of dollars. When Shin and Do Kwon met, Shin was interested in Kwon's work and they developed a rapport. A partnership formed between them. Shin brought his extensive list of contacts and practical business sense to the table, to complement Kwon's technical expertise.   With this founding team in place, Terra was able to attract $32 million of investment from some of the world's biggest Crypto exchanges, like Binance. It was a promising start, and one which has led on to continuing success for the project. But it's not all sunshine and rainbows for Terra. Even with a project as promising as this one, there are always some dark clouds on the horizon.

Risks

How to Destabilise a Stablecoin

Remember the bit that I said was for nerds only? Yeah to understand this risk, you'll need to go back and read that bit.

The first major risk is to Terra is known as the Death Spiral. Sounds serious, I know. In May 2021, the crypto market crashed. Luna crashed with it - the price of Luna fell around 75%. Demand for UST also reduced, causing it to fall below the peg of $1. At this point, the algorithm burned UST to print Luna tokens, prompting the price of Luna to fall even further. Some were talking about a full-on collapse. This has happened before, to projects like Titan. But compared to Titan, Terra has extra stabilising features, a good team and a very engaged community. All of which helped it survive this scary episode.

The biggest protection from this risk is demand for UST. And there is a lot of it, thanks to the success of Chai, Anchor Protocol, Mirror Protocol and some of the other successful projects that have been built on the ecosystem.

Govcoins

Another risk for Terra Luna’s stablecoins are Govcoins. Governments and central banks around the world are thinking of launching their own digital currencies. If governments around the world were to start doing this, this would reduce the need for the stablecoins on the Terra network.

Regulation

Another big risk for Terra Luna is regulation. As it expands its global reach and becomes a borderless digital bank, it could be subject to new regulations from authorities around the world. However, some argue that Terra Luna may benefit from regulation. This is because some of Terra's competitors, that produce their own stablecoins, are centralised. So they may, in future, have to comply with regulation around how they can store underlying assets and process transfers. But Terra's stablecoins are decentralised stablecoins, they are much harder to regulate in this way.

Scaling Issues

At the moment, Terra processes 1000 transactions per second. There is a risk that as all these new projects are launched and Terra gains widespread adoption, that the Terra chain becomes congested and the network becomes slower. Terra is devoting a serious amount of capital for improvements to the system. The team recently announced their intention to spend $1 billion on upgrading infrastructure.

How to Buy Luna Tokens

If you're interested and want to be exposed to some of the upside that may come with the expansion of Terra, this quick setup guide will show you how to buy Luna tokens, and stake them to earn a yield. If you stake Luna, you are also entitled to receive airdrops of future projects on the Terra Luna network.


1. If you’re outside the US, the easiest way to buy Luna is to go on binance.com, search Luna and purchase it. Once your account has been verified, go to the Buy Crypto tab. You will see that you can’t buy Luna directly. You have to buy something like Bitcoin or Tether (USDT), and then swap that for LUNA tokens.

2. For US investors, I would recommend a workaround using coinbase.com. You can go on coinbase, purchase Mirror tokens, set up your Terra station wallet (steps below) and then swap your Mirror tokens for Luna tokens

3. Download the Terra Station chrome extension and click Add to Chrome

4. Open the browser extension, and then create a new wallet

5. Pay special attention to the Seed phrase. That Seed Phrase gives you access to your wallet. So guard that Seed Phrase carefully

6. You then have to confirm your seed phrase

7. Go to https://station.terra.money/.  In the top left corner, you will see your Terra Station wallet address. You can then send the Luna tokens you have bought to this address

8. Go to the Navbar and go down to Staking. Here you can see a list of validators you can stake your funds with. The top 3 will be marked with the numbers 1,2 and  If you don’t have any other preferences, these would be the best places to stake your Luna tokens.

9. Select a validator and delegate funds. Remember not to delegate all available Luna tokens. Keep a little in your wallet, in case you need them for transaction fees.


Conclusion

Terra Luna is already used for payment processing, cross-border transactions and savings accounts by millions around the world. As we said before, Terra Luna is aiming to disrupt the digital payments industry. The current incumbents of this industry include behemoths like American Express, Mastercard, PayPal and Visa.  This platform has the potential to go from strength to strength, and if it does manage to reach even a fraction of the size of some of the incumbent payment processing behemoths, there is huge upside to be had here.

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Jamie Larson
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