Terra is a public, proof-of-stake blockchain network built using Tendermint consensus and the Cosmos SDK. Terra provides a suite of stablecoins collateralized by the network’s native token, LUNA, which captures the value of economic activity on the network and is used in governance and staking.
Terra stablecoins underpin the network’s economic activity, serving as the basis for interacting with applications built on top of Terra’s blockchain for payments (Chai), earnings (Anchor) and investing (Mirror). Terra is the first and largest (by market cap) algorithmic stablecoin network today, and only trails Bitcoin and Ethereum in annualized on-chain transaction fees.
The Terra blockchain is designed to provide fiat-pegged stablecoins that can be used for payments, earnings and other applications. It combines the stability and wide adoption of fiat with the security and efficiency of blockchain solutions.
Terra is secured with a proof-of-stake consensus algorithm based on Tendermint. The native LUNA token can be staked as collateral to validate transactions, with rewards proportional to the amount of LUNA staked.
Besides securing the Terra network, LUNA also plays a crucial role in pegging the value of Terra stablecoins to fiat currencies.
Terra achieves price-stability by algorithmically adjusting coin supply according to fluctuations in demand. For instance, an increase in demand for US dollars on Terra (the UST stablecoin) manifests in an increase in the volume of UST transactions and a surge in the price of UST. As a result, Terra must ensure that its price does not deviate from its peg. In this scenario, the supply of UST must increase to compensate for the extra demand. This is known as expansion.
In the opposite scenario, a fall in demand for UST results in decreased transactional activity and a drop in the price. In this case, the supply needs to be cut to keep the peg within the acceptable stability bounds. This is called contraction.
Expansion and contraction of coins supplies on Terra are achieved by naturally efficient market forces and the opportunism of individual arbitrageurs. LUNA holders are incentivized to swap LUNA for stablecoins at profitable exchange rates, expanding and contracting the stablecoin supply appropriately. For example, if demand for UST is increasing, arbitrageurs will mint 1 UST by burning $1 worth of LUNA and selling that 1 UST on the open market for a riskless profit.
In the short term, LUNA stakers absorb the volatility of stablecoins on Terra. In thelong term, they are rewarded with increased mining rewards from the adoption of the network’s stablecoins via apps built on top of the network.
Watch this video for a simple explanation:
Terra currently offers stablecoins pegged to the US dollar (UST), South Korean won (TerraKRT), Mongolian tugrik (TerraMNT) and the IMF’s Special Drawing Rights basket of currencies (TerraSDR).
New stablecoins pegged to additional fiat currencies can also be minted if voted for by the Terra community. Proposals were recently accepted to mint stablecoins for the Chinese Yuan (CNY), Japanese Yen (JPY), British Pound (GBP, Indian Rupee (INR), Canadian Dollar (CAD), Swiss Franc (CHF), Hong Kong Dollar (HKD), Australian Dollar (AUD) and Singapore Dollar (SGD).
Terra hosts a number of applications for payments, earnings and investments that make use of its stablecoins. These have already seen significant adoption, with billions of dollars in transaction volume and TVL.
All of the applications built on top of Terra increase demand for the network’s underlying stablecoins, which accrues value to LUNA stakers that share in payment and swap fees. Additionally, as demand for a coin like UST increases, more LUNA is burned, making LUNA more scarce than before.
Terra applications include:
One of Terra’s many fiat-pegged stablecoins, TerraKRW, powers Chai, which is already one of the largest e-commerce wallets in Korea. Through an API called I’mport, Chai enables merchants to accept payments via 20 different options (e.g. debit, credit, PayPal, etc.) with low fees and fast settlement. On the back-end, Chai uses Terra’s stablecoins to settle transactions faster and cheaper than legacy counterparts. Notably, users of Chai are never actually exposed to interfacing with Terra directly, making the user experience extremely smooth.
Chai hosts over 2 million users and has generated over $2 billion in annualized transaction volume. It recently raised a $60 million Series B.
Mirror is a synthetic assets protocol built on the Terra network that is designed to provide real-world exposure to all types of asset classes such as US tech equities, commodities, ETFs and crypto assets. It allows for the creation and trading of “Mirrored Assets” (mAssets), which allow users around the globe to trade on the price action of real-world assets, such as Amazon (AMZN) stock.
Minters of mAssets enter a collateralized debt position (CDP), where they collateralize the minted mAsset with UST at a specific collateral ratio as determined by the Terra community’s governance (derived from the volatility of the asset). mAssets can then be trivially traded on multiple chains including Terra, Ethereum and Binance Smart Chain.
Minters of mAssets are effectively taking a short position against that asset, which means that if its price increases, they will need to add collateral to their CDP to avoid liquidation. In Mirror V2, inverse tokens will alleviate this by allowing positive exposure to mAssets for minters.
Mirror has accumulated more than $2.3 billion in TVL and $1.2 billion in liquidity since its December 2020 launch.
Anchor is a savings protocol offering low-volatile yields on Terra stablecoin deposits. It offers incentives in the Anchor token (ANC). The “Anchor Rate” (the target APY Anchor seeks to pay out to depositors) is powered by a diversified stream of staking rewards from major proof-of-stake blockchains. This makes up the “real yield”. If the real yield is greater than the Anchor Rate, the excess yield is stored in a UST denominated “yield reserve”. ANC incentives to borrowers drop by 15% every week. If the real yield is less than the Anchor Rate, the yield shortfall is drawn down from the yield reserve until it is depleted. Additionally, ANC incentives to borrowers increase by 50% every week until the real yield converges to the Anchor Rate.
Anchor currently holds $1 billion in TVL.
Terra was launched by the South Korean company Terraform Labs (TFL) in January 2018, founded by Daniel Shin and Do Kwon. Before Terra, Shin co-founded the South Korean e-commerce platform Ticket Monster (TMON) and start-up incubator Fast Track Asia. Kwon previously founded Anyfi, a startup providing decentralized wireless mesh networking solutions.
Investors in Terraform Labs include Galaxy Digital, Coinbase Ventures, Pantera Capital, Arrington XRP Capital, PolyChain Capital, Binance Labs, Huobi Capital, FBG Capital and TransLink Capital.