Terra Luna, ‘LFG’ and Bitcoin!

At the very height of the crypto bubble, the same month that it crashed in January 2018, South Korean start-up graduates Daniel Shin and Do Kwon created Terraform Labs and the now very popular Terra Luna. The top 20 was very different at that time and half of the projects on the list aren’t even in the top 100 now, so it makes sense that traders would be cautious of yet another coin on the market. Although it did take some time for Terra Luna to find its feet, it definitely has with a huge uptick in active users as well as a huge rise in active developers who are creating the next applications on top of the blockchain.

The Terra Blockchain

Terra, UST and Bitcoin

Terra was created to aid the mass adoption of cryptocurrencies digitally native assets that are price-stable against the world’s major fiat currencies. You may have heard of $UST before. There are also a host of others (such as: KRT, GBT, EUT, AUT and many more) which can be easily traded within their popular Terra Station application. After gaining adoption, the company have the goal of bootstrapping blockchain a payments network to an enormous scale and facilitate far more powerful products and use cases through its infrastructure. Terra’s stable-coins, especially $UST, a peg to the world’s reserve currency has seen enormous growth in the last year and is only continuing to grow. Unique in its design, for every $UST minted, the equivalent value of $TERRA would be burnt. Due to this, the value of the token has been amongst the most consistently top performing projects in the last 12 months with a solid uptrend and currently knocking on the door of all time highs, making US$117 on 3 April 2022.

The Terra Luna chart during 2021–2022

The $UST-$TERRA burning system has been incredibly stable and it has only lost it’s peg fractionally in the last year by about 10 cents, causing the price to crash. However, in order to both protect the peg from destabilising and also to give people from different cryptocurrencies faith in their system, trailblazing co-founder Do Kwon announced in March 2022 that Terraform Labs would be buying US$10 billion worth of Bitcoin and

Terraform Labs has had enormous growth in users attracted by the very novel burning mechanism, DeFI products such as Anchor protocol and a team who are willing to take exciting risks in order to innovate and branch out much further than their own ecosystem.

How Does Terra Work?

Cryptocurrency scene in South Korea

South Korea has long been a hotbed for technology adoption and innovation and crypto currency is no different. The country ranks 16th in terms of crypto adoption, with 1.9 million people, or 3.79% of its 55.7 million-strong population, owning some form of crypto-asset, according to data by payments provider Triple A. There are many crypto projects coming to life and active in the greater Seoul area and the incoming president is pro-crypto for both investors and companies alike. Companies like #Hashed and Terraform Labs and spearheading innovation and growth in the sector.

CHAI

Terra mainnet officially launched in April 2019 and not too long after launched CHAI — an innovative payment service that enables consumers to easily pay for items online by simply adding their bank account. CHAI is fully connected to banks in South Korea but its infrastructure is fully on the Terra blockchain allowing near instant payments to vendors so that vendors do not have to wait several days for payments to be cleared and compared to traditional finance, fees are negligible. The project was extremely successful and within just a few months had already transacted about $54 million in payments and saved merchants roughly $810k in fees that would have been payable if done through traditional vehicles. CHAI later expanded to Mongolia and is a shining example of Terra Lab’s goal of executing their vision by enabling use of their blockchain and main stream adoption through a useful application which bootstrapped traditional finance onto cutting edge blockchain technology.

CHAI presentation in 2019 showing how easy it is to sign up.

The Growth of UST and Terra

As mentioned, Terra Luna aims at mass adoption of the Terra blockchain by utilizing tokens pegged to various world currencies, most notably the $UST stable-coin. It is unique because it is automatically pegged by a burn system between the stable-coin and terra — there isn’t a backing of actual fiat currencies like most other stable-coins (USDC, Tether) employ. From relative obscurity, $UST has been growing in use case and its market cap has jumped exponentially in the last 12 months, especially in November 2021 when it more than doubled in a week. As they said on page 11 of their 2019 white-paper, “Terra Platform DApps will help to drive growth and stabilize the Terra family of currencies by diversifying its use cases.”

The market capitalization of $UST skyrocketed after November 2021

Ecosystem Growing

Terra has been aiming at mass adoption from their outset and increased usage happens on applications built on top of their blockchain. Therefore it is no surprise that they have made a concerted effort in having strong development documentation and incentives to grow their ecosystem. According to the January 2022 Electric Capital Developer Report, Terra more than 3x’d their developer count of active full-time developers who worked on projects on their ecosystem.

Electric Capital Developer Report (2021)

As at March 2022 there are dozens of of new startups and projects working on the Terra blockchain with several innovative applications doing interesting things that other projects aren’t doing on other blockchains. If you were to choose just one project that Terra Luna is most famous for, that would have to be Anchor Protocol.

Coin98 infographic showing the growing Terra DeFi ecosystem

Anchor’s huge APY — or is it?

At the forefront of DeFi, Anchor Protocol, essentially a DeFi savings and borrowing platform. Unique to Anchor is it’s very high rate of interest, usually stable at around 20% per year. Such a rate is unheard of in the traditional finance world and was hugely successful in both $UST gaining traction and the Terra Luna price rise over the last year. In fact, according to Defi Llama in April 2022, Terra is the second used blockchain in DeFi with Anchor Protocol being a whopping 52.49% of all of that Total Value Locked (TVL).

DeFi Llama, Terra

Anchor Protocol was instrumental in $USTs growth

There was fear in the market for holders of Terra Luna around the beginning 2022 when it became apparent that there was only a few weeks available of incentives in order to keep the Anchor Protocol interest rate a stable 20% per year, so people began to be concerned whether there would be a mass exodus from the Terra Luna ecosystem with a dumpage in $UST and therefore a drop in price for the Terra Luna token itself. This forced the Terra Luna team to think of innovative ways in order to stablize the yield reserve in order to quell an exodus from their ecosystem. A number of huge decisions were made by both Anchor Protocol and Terraform labs.

Tweet from Do Kwon regarding the Anchor Protocol yield reserve, January 2022

Despite critique that the rate isn’t really sustainable, Kwon compared the rate of 20% to other incentives and said it was relatively low and indeed could be sustainable. [Kwon at 31:18]

Do Kwon announced that they had backed up the yield reserve and Anchor Protocol announced also said that they would implement a semi-dynamic yield rate in the vault from 1 May 2022. In order to bolster the reserve for $UST, Terraform Labs gave birth to The Luna Foundation Guard (“LFG”), a nonprofit organization focused on the Terra blockchain protocol which announced that they would add Bitcoin to their balance sheet.

Bitcoin Collateralization

At this stage, well over a decade into its life and being the very first crypto currency to exist, Bitcoin is in a league of its own and is the apex of cryptocurrencies and leads the market in terms of market cap, security, decentralization and more. Its use-case is fluid, depending on the current narrative that the world gives it, as time passes more and more people have become ‘bitcoiners’ and in the last few years many companies have added it to their balance sheet as both an investment and as collateral with several sovereign nations and municipalities also following suit. Many of the legendary investors who had previously not supported it have come on board as ‘bitcoiners’ and some, such as Bill Miller now have 50% of their wealth in the asset. As Bill said, “I think the average investor should ask himself or herself, what do you have in your portfolio that has that kind of track record — number one, is very, very under-penetrated; can provide a service of insurance against financial catastrophe that no one else can provide and can go up 10 times or 50 times? The answer is: nothing.”

Do Kwon and the team at Terraform Labs also has the same kind of conviction as Bill Miler and in March 2022, they announced that they would purchase $US3 billion in Bitcoin as a collateral for Terra Luna, in conjunction with their burn mechanism.

LFG later upped their Bitcoin collateralization promise to US$10 billion

The Diplomatic argument

Bitcoin arose from the ashes of the 2008 Lehman Brothers Shock that brought the entire world into financial disarray and many lost faith in global financial systems. Although it was extremely niche at the time, it started to gain traction over the last 12+ years since its inception and has seen dramatic price volatility, although generally in an upwards trend. The era of Covid-19 has inevitably ushered in enormous financial turmoil where people were once again forced to confront their opinions of financial institutions, investments and money. Therefore, it is no surprises that Bitcoin and cryptocurrencies, with their innovation and novel use cases outside of the traditional finance world have increased in usage as well as market capitalization. Bitcoin has been stress tested since its inception and as a network it is rock solid and fully decentralized globally and gradually its value is being assessed based on a new narrative every year or two. Whether it’s value is in purchasing goods, sovereignty, store of value or something that we have not predicted yet; gradually, more and more ‘get off zero’. Bitcoin’s price can be seen as its ‘marketing department’, if we were to analogize it as a company. Wave after wave of interest and renewed interest in the asset generally points that the price will go up.

InvestAnswers, [Twitter]

Putting their money where there mouth is, the initial US$3 billion which was gained by the sale of assets for the purchase of Bitcoin in the immediate future, the goal was later upped to US$10 billion, which would potentially put LFG as the second largest Bitcoin holder after Satoshi Nakamoto themselves. The Bitcoin address is public and as at 3 April 2022 they currently hold 30, 272 Bitcoins. A Twitter bot is tracking all purchases here. They are intending on making their position a meaningful percentage of the market capitilzation of $UST within the next year.

LFG’s Bitcoin address — the company is transparent and it will likely remain public.

Why have Terraform Labs decided to do this?

As previously noted, the system whereby Luna absorbs demand volatility for $UST is reasonably robust, if demand were to drastically change due, it could lead to a spiral situation where the price of Luna could fall at the same time as market capitalization of $UST supply contracts. Having the foresight to see that with the increased user demand for $UST, on the Terra blockchain and outside of it, the company sees that they must have a duty to ensure that such a catastrophic event doesn’t occur and therefore is diversifying their reserves with Bitcoin as collateral.

LFG Reserve, 2 April 2022

Diplomacy and Expansion to other blockchains

Moving forward, as more chains use the $UST stable-coin as well as Terra exacts its vision to be the worlds largest decentralized money, faith in Luna’s collateral and system is lessened as crypto has been rather insular and tribalistic. Diplomatically, the first step in gaining the trust of other blockchains and ecosystems is to hold the apex asset in crypto, Bitcoin. The next step, as Kwon mentioned in a recent interview with Laura Shin is to hold other assets that Luna hopes to expand to as collateral, such as Solana and Avalanche.

Do Kwon tweet about collateral of other blockchains, 25 March 2022

The future of Terra

Once their purchase of Bitcoin has been completed, they will then go about exacting it as ‘a fractional forex reserve’, whereby in the past $US1 of Luna was burnt for $1UST, they will implement it as some Luna getting burned and some Luna to be used to provision the decentralized forex reserve, where the DAO will decide the ratio. When this mechanism is actually implemented automatically on the chain, it ought to make the peg infinitely stronger, and $UST won’t just be an algorithmic stable-coin but also be backed by a hard asset.

Terra Station will be updated in the future with new features to exchange to from Bitcoin and $UST. Terraform Labs have said that set up a special smart contract into which it will accept two pools: a pool of $UST and a pool of Bitcoin. The oracle will stream prices to the dApp in terms of what the effective price is of Bitcoin at that given moment in time. At any point, users would be able to retrieve $UST from the pool by depositing Bitcoin at an exchange rate is telling the smart contract based on the oracle at par value. Users will also be able to redeem Bitcoin for $UST.

What next?

It was obvious from the beginning that Terra’s largest app and home to more than 52% of TVL, Anchor Protocol, would not be sustainable forever. Most DeFi projects utilize a system of offering high APY to users who pile into a project earlier and the rewards thin out over time, dependant on how many active users are yield farming. This can be seen in the Solana Summer with projects like Sunny Aggregator. However, whether it is seen as a marketing tactic or not, it has been a wildly successful way to get people to adopt the $UST stable-coin. Now $UST is widely adopted and at ranking #4 in all of stable-coins, it is likely to continue to rise with the traction that it has made and the backing of Bitcoin as a collateral.

In September 2021, Terra launched an upgrade called Columbus-5. This added functionality for the Inter Blockchain Communication (IBC) protocol, which allowed Terra to become interoperable with other blockchains. As Terra work out how they can automate the burning mechanism to work in combination with the Bitcoin collateral, they will also continue to expand out to several other blockchains and they hope to use Terra as a layer 2, to Bitcoin and more.

Terra Luna itself continues to go from strength to strength, initially with the test case of CHAI in South Korea and Mongolia, and ultimately the proliferation of $UST globally through novel DeFi applications like Anchor Protocol and more. The future of the Terra Blockchain looks bright.

Conclusion

The UST supply has gone from US$2 billion to almost US$16 billion since November, resulting in the destruction of hundreds of millions of LUNA tokens — and a corresponding rise in the LUNA price. Inflation rates of many nations, including the world reserve currency the US$ have been increasing since the beginning of the pandemic and there is little likelihood that this will slow down even with quantitative easing. As the value of the dollar goes down, the actual value of many hard assets go up. Bitcoin is one of the worlds hardest assets and has always been a permissionless, decentralized network that powers a fully transparent asset. If Terraform Labs implement their system to leverage Bitcoin as a collateral in an automated way and Bitcoin continues to go up, UST could become a dollar stable-coin backed by a fully transparent asset. It is not only a truly important use-case for Bitcoin for Terraform Labs, but a very unique way of bolstering the trust in their stable-coins as well as being generally good for the entire cryptocurrency markets.

Terra is in prime position to take the cake and become the number 1 leading stable-coin with its very novel approach to adding Bitcoin to it’s reserves in addition to utilizing $UST on other chains. Like many around the world, we are excitedly watching Terra’s experiment play out in real life.

References

  1. Korea runs on Terra — CNBC Presentation. [https://www.youtube.com/watch?v=yGGalxADnbc]
    2. Terra White paper. [https://assets.website-files.com/611153e7af981472d8da199c/618b02d13e938ae1f8ad1e45_Terra_White_paper.pdf]
    3. Coin Burn. [https://www.investopedia.com/tech/cryptocurrency-burning-can-it-manage-inflation/]
    4. Analysis of Terra User Groups. [https://app.flipsidecrypto.com/dashboard/analysis-of-terra-user-groups-xMuWT7]
    5. How Does Terra Work?. [https://youtu.be/KqpGMoYZMhY]
    6. Crypto Ownership. [https://triple-a.io/crypto-ownership/](https://triple-a.io/crypto-ownership/)
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    8. CHAI (12 June 2019 annoucement). [https://medium.com/terra-money/terra-partners-with-mobile-payment-app-chai-29c593f0a364]
    9. In numbers: Four Months of CHAI. [https://medium.com/terra-money/in-numbers-four-months-of-chai-a8820a1dc2f5]
    10. Electric Capital Developer Report (2021). [https://medium.com/electric-capital/electric-capital-developer-report-2021-f37874efea6d]
    11. Stable-coin Rankings on Coin Gecko. [https://www.coingecko.com/en/categories/stablecoins]
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    18. Defi LLama. [https://defillama.com/chain/Terra]
    19. Anchor Protocol Reserves Slide as Money Market’s Founder Talks Down Concerns. [https://www.coindesk.com/markets/2022/01/28/anchor-protocol-reserves-slide-as-money-markets-founder-talks-down-concerns/]
    20. Terra Money[https://www.terra.money/]
    21. Terra Station[https://station.terra.money/]
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    24. Kraken CEO: Bitcoin Going To Infinity & Will Replace All Currency. (4 Mar 2021) [https://youtu.be/d0D76WtMhx4]
    25. LFG Twitter Bot. [https://twitter.com/LFG_Reserve]
    26. Inflation vs. Recession: The Fed Is Walking a Tightrope. [https://www.nytimes.com/2022/03/17/business/federal-reserve-inflation-recession.html]
    27. Layer 2 — Binance Academy. [https://academy.binance.com/en/glossary/layer-2]
    28. Do Kwon Is Backing UST With Bitcoin — And Here’s What Else He Is Building — Ep.335. [https://www.youtube.com/watch?v=NMRbP_b4JXM]
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    33. Crypto Billionaire Do Kwon Says Terra (LUNA) Plans on Being Biggest Bitcoin Holder in World, Other Than Satoshi. [https://dailyhodl.com/2022/03/30/crypto-billionaire-do-kwon-says-terra-luna-plans-on-being-biggest-bitcoin-holder-in-world-other-than-satoshi/]

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Bisonai Technology Group focuses on solving hard technical problems with the use of Blockchain and Artificial Intelligence. https://bisonai.com/