The Terra (LUNA) ecosystem continues to outperform the currently stagnant crypto space. Over the past year, Terra has exceeded all expectations, becoming Ethereum’s closest layer-1 blockchain competitor with $26.45 billion TVL.

Terra displaces so-called “Ethereum killers” like Solana and Avalanche

Terra’s 12.16% DeFi market share replaced many previous “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 by $10 billion in BTC on March 14, its leading algorithmic stablecoin is set to replace Dogecoin (DOGE) by market capitalization. As of Friday, March 18, the Singapore-based non-profit Luna Foundation Guard (LFG) has already raised $1 billion in OTC token sales to establish a foreign exchange reserve for the UST stablecoin, denominated in Bitcoin.

Overall, in more than a month, the stable market capitalization of TerraUSD (UST) increased by 36%, from $11.23 billion on February 1 to $15.27 billion on March 18. This placed UST just behind DOGE’s $15.59 billion market capitalization in 14th place. Meanwhile, Terra (LUNA) is in seventh place by market capitalization, just behind XRP (XRP), with a market capitalization of $31.6 billion.

Interestingly, XRP and LUNA are projects aimed at displacing international payment systems. However, as UST is an algorithmic stablecoin closely related to LUNA, the latter reflects its substantial growth.

What’s so special about Terra’s ecosystem?

Founded by South Korean programmers Do Kwon and Daniel Shin, Terraform Labs launched the Terra Blockchain in 2018. However, it took Terra until March 2021 to cross the 1% DeFi TVL (total value locked). From the start, Terra was envisioned as a stablecoin hosting platform to become a global payment network.

Over the past two years, the South Korean fintech market has been instrumental in its growth. Specifically, South Korea’s decentralized payment app CHAI using Terra’s infrastructure has received total funding of $120 million and serves more than 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 exchanged on Terra’s blockchain.

On top of that, Terra offers dApps like Ethereum but is considerably more affordable. Idle stablecoin money can then be locked into Terra’s Anchor protocol, serving as a high-yield savings account, paying exponentially more interest than any traditional bank account.

Therefore, Terra offers several immediately apparent benefits:

• More efficient payment system as demonstrated in a real large scale application by the CHAI application.
• Fast and almost cost-free payments in addition to bank replacement for holding cash.
• Avoidance of anxiety associated with crypto volatility, focusing on stablecoins.

The last point is critical, because Terra’s UST is not just any stablecoin.

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Terra’s UST Algorithmic Stablecoin Explained

So far, it has become clear that there are three paths to creating a stablecoin, as an essential bridge between fiat and crypto. The likes of USD Coin (USDC), operated by Circle and Coinbase, and Paxos (USDP) are both highly regulated. This means that their reserves are properly guaranteed and verifiable by federal agencies, so there is no risk of a bank run.

Then there is Tether (USDT) whose support is questionable. As the largest stablecoin with a market capitalization of $80.4 billion, Tether’s reserve is so poorly audited that Tether’s representatives didn’t even show up for the congressional hearing on stablecoins.

Finally, there are algorithmic stablecoins, representing the native blockchain ecosystem by being backed by other crypto assets instead of fiat currencies. In the case of TerraUSD (UST), it uses Terra’s native LUNA to maintain its dollar peg.

Specifically, the UST is powered by oracles from a basket of fiat currencies from the International Monetary Fund’s Special Drawing Rights (SDRs), the IMF’s unit of account created in 1969. Using this basket TerraSDR of fiat currencies, Terra’s LUNA tokens secure them via a hot mechanic.

• If 1 TerraSDR is less than 1, 1 TerraSDR is converted to 1 SDR in LUNA tokens. This causes the TerraSDR supply to decrease, raising the peg to a 1:1 ratio.
• If 1 TerraSDR is greater than 1, an SDR is converted to TerraSDR. This causes the supply of TerraSDR to increase, bringing the peg back to a 1:1 ratio.

Therefore, as an algorithmic stablecoin based on smart contracts, TerraUSD (UST) does not need any physical (institutional) collateral. Instead, everything is done on-chain via band oracles that feed the price of fiat currency into smart contracts.

As you might guess, this is very appealing to crypto investors who value native blockchain solutions on centralized gateways. Additionally, traders engaged in this constant stablecoin arbitrage earn rewards whether the supply of LUNA tokens decreases or increases.

Do you think all algorithmically controlled stablecoins are a better idea than centrally controlled ones? Let us know in the comments below.

About the Author

Tim Fries is the co-founder of The Tokenist. He has a B.Sc. in Mechanical Engineering from the University of Michigan and an MBA from the University of Chicago Booth School of Business. Tim was a senior partner on the investment team in the US Private Equity division of RW Baird and is also a co-founder of Protective Technologies Capital, an investment firm specializing in detection, protection and control solutions.