I’m incredibly excited about the Terra blockchain. $LUNA (Terra’s native gas, staking, and governance coin) makes up the largest portion of my portfolio by far, because I’m so stoked on the project, and has undergone significant price appreciation this year (think 10x since the May crash). To understand why I’m so hyped about Terra and $LUNA, we must return to the core of my last story.

Stablecoins are the future.

In one of my earliest stories for Digital Native Citizen, I wrote this as a quick overview of the core of the Terra project:

Terra’s aim is to create an ecosystem of crypto stablecoins — coins pegged to various traditional fiat currencies around the world like USD, EUR, AUD, KRW, JPY, etc. These stablecoins can be used to power international payments and other financial services applications in currencies that are already familiar to users. — A Comprehensive List of Major Blockchains by yours truly.

Terra’s stablecoins belong in the “algorithmic” category of stablecoins, as the coins are not backed by any sort of reserve, rather they’re backed by a decentralized economy and a unique arbitrage mechanism that helps maintain the stablecoin pegs to their fiat equivalents. This means that Terra has near-infinite scalability and can build a crypto economy without being tied to the traditional finance industry.

In the future, Terra could become a key component in a truly international DeFi (decentralized finance) reality, powering payments and other financial instruments around the world and giving access to crypto stablecoins in currencies familiar to those people around the world (instead of everything being done in USD stablecoins).

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So How Do These Stablecoins Actually Work?

Terra is built on its native coin called $LUNA. This coin, in essence, backs all outstanding stablecoin issuance through Terra’s mint/burn mechanism and arbitrage. Without getting too far into the weeds, basically whenever you want to mint more $UST or another stablecoin, you have to burn an equivalent amount of $LUNA at its current price ($100 of $UST can be minted in exchange for $100 worth of $LUNA for instance). This also works in reverse, so you can burn stablecoins and receive an equivalent amount of $LUNA in return.

When the crypto world needs more stablecoins, this is what happens to $LUNA. And the crypto world will constantly be needing more and more stablecoins. Burned $LUNA = less $LUNA supply = higher $LUNA price.

So, as the demand for Terra’s stablecoins increases, the circulating supply of $LUNA will decrease, causing $LUNA’s price to rise and slowing the rate of supply contraction as well.

I mentioned arbitrage earlier as a way that the project maintains its stablecoin pegs, but that gets wonky really quickly. The quick version is that people can take advantage of the difference in the burn/mint price of $LUNA and stablecoins and the market price between those same two assets to make tiny profits on larger trades and that helps keep the circulating supply of the stablecoins in-line with overall market demand for them (so their price remains stable). There’s actually also a project in development that is opening up this process to anyone, so you can put your $UST up on this protocol which pools many people’s funds together to engage in this arbitrage and spread the profits out amongst all the depositors.

How $LUNA Accrues Value

$LUNA’s value comes from two (arguably three) main things.

1. It backs outstanding stablecoin issuance and increases in value as more stablecoins are demanded by the market (which if you agree with me that stablecoins are the future, then obviously this is exciting as an investment).
2. It can be staked on Terra’s mainnet to earn rewards from network fees and burn/mint fees between $LUNA and Terra stablecoins.
3. It can be used to participate in decentralized governance of the Terra project and its blockchain. I say this is arguable as a source of value, as most investors realistically do not care about governance.

How Terra Could Fail

So even though I’m super stoked about Terra, I still did my due diligence on the project before committing such a large portion of my portfolio to it. I won’t get into the weeds on this, but after doing a lot of research, I determined that there’s really only one scenario where the project could fall apart: If the market capitalization of $LUNA crashes below the market capitalization of all outstanding stablecoin issuance AND there’s a large scale decision to stop using Terra stablecoins across the board. In other words, it would require a true black swan event.

To those who’re waiting for the collapse that will never be as bad as they think while the rest of us make money.

I don’t believe, even in a really rough crypto crash, that this will happen. Firstly, $LUNA’s value as the staking asset for the Terra blockchain — and the fact that staking rewards for $LUNA are denominated in large part in stablecoins — gives it an implicit price floor based on its blockchain usage. As long as its blockchain and stablecoins are being used, staked $LUNA will continue accruing rewards, in those stablecoins, with rates even rising with downward price pressure on $LUNA. $LUNA backs an entire blockchain, and not only that, the Terra blockchain is one of the easiest and most user-friendly blockchains on the market today.

Secondly, Terraform Labs (the creators of Terra) are extremely well-funded and have been investing heavily in the infrastructure of Terra and the technologies that back it ($250–300M worth of $LUNA with today’s prices). I believe in their team and their approach to blockchain product development, and as I mentioned, I personally feel that the Terra blockchain is one of the most frictionless experiences I’ve used so far.

So is it possible for Terra to fall apart? Technically yes, but I don’t think it’s going to happen, even in an extreme market-wide crash scenario.

Terra’s Focus on $UST

Terra’s USD-denominated stablecoin is currently #4 in total market cap among all stablecoins at roughly $7.5B total issuance. In fact, all the other Terra stablecoins’ market caps combined make up less than $100M worth of total issuance, so $UST is obviously almost the entire total outstanding issuance of Terra stablecoins.

From Do Kwon’s tweets (Founder of Terra and Project Lead) and the overall developments in the Terra world, it’s clear that the priority of the project right now is to expand $UST usage as a standardized stablecoin that can compete with the other major USD-denominated stablecoins like USDT and USDC. They are focusing both on expanded usage on Terra’s mainnet blockchain and exporting $UST to other blockchains like Solana, Ethereum, Cosmos, and Harmony.

This approach makes a lot of sense for a few reasons. For one, there’s not really enough total stablecoin demand (yet) to support large market caps (>$10B) among several international stablecoins. Building on that, the focus on $UST has made it a serious competitor, by market cap, among stablecoins, and that high-profile positioning helps with legitimizing and building name recognition for Terra. And finally, this focus on making $UST an invaluable and widely used stablecoin will help provide extra security for $LUNA and strengthen it against a black swan event.

When someone questions Do Kwon’s vision, this is his response.

However, it is also somewhat misaligned with the original ethos of Terra as an internationally-focused stablecoin ecosystem, not just a USD-focused ecosystem. In fact, many people who are new to the Terra world are surprised to hear that the first Terra stablecoin was the South Korean Won (ticker $KRT), and Terra’s first major application was a payments application that used $KRT behind the scenes to facilitate everyday ecommerce payments in South Korea, often with users not even aware they were using crypto technology. This was a big reason I got into Terra in the first place, as it seemed like they were focused on a real-world use-case of payments.

But the focus of the chain has clearly shifted from that original premise, likely because they discovered it was very difficult to get more and more payments moved over to the blockchain and that it was easier to try to get a slice of DeFi demand, powered by $UST, instead. I do think that Terra’s blockchain product is one of the best user experiences I’ve seen so far in crypto, and this emphasis on a short-term DeFi strategy isn’t necessarily a bad thing right now. They are out-competing everyone in user experience in my opinion, and they will pick up more and more of the existing crypto market because of this, thereby powering strong returns on my (and your) investment. Plus, it does strengthen $LUNA against a black swan event like I mentioned earlier.

This is me when $LUNA hits $500 (not impossible in this bull run).

But I would be remiss if I didn’t mention that I do think this strategy is a short-term one, and eventually the Terra team will need to re-focus on the long-term again with international payments and DeFi.

Terra’s Ecosystem

Before I leave you today, I wanted to briefly touch on the Terra ecosystem. Terra is a layer-1 blockchain, so a big measure of its value and success is the quality and quantity of dApps (decentralized apps) that run on its network.

With the launch of Digital Native Citizen’s newsletter this week, I’m going to be running a short series on exploring the Terra ecosystem: four stories, one per day, Monday through Thursday next week.

I will save the specifics for next week’s stories, but Terra has a small, but fairly high-quality suite of dApps today. This list is expanding as more and more developers come to Terra to build their apps (or likely port over existing apps at some point).

The “Blue Chips”

Terra has a small core of foundational dApps that comprise what I consider to be the “blue chip” projects. These include Anchor Protocol, Mirror Protocol, Pylon Protocol, and Terraswap.

Anchor is a decentralized savings and lending protocol that lets users earn high interest (20% APY, yes you read that right) on their $UST by committing it to the protocol which then lends that money out in collateralized loans, earning interest which is paid to depositors. Basically a bank run by code instead of by humans.

Mirror is a platform that allows you to trade synthetic assets that mirror the price of things like stocks, other cryptos, and more.

Pylon is a yield-redirection platform that allows you to make ongoing payments with the yield from crypto assets rather than paying for something directly — essentially I deposit my asset and its yield is sent to the recipient in lieu of a traditional subscription. Initially, this was redirecting Anchor’s 20% APY on $UST, but they have plans to explore more yield assets in the future.

And finally you have Terraswap, Terra’s first and most utilized decentralized exchange (DEX). DEXes are a key component of crypto ecosystems, and I’ll be writing a longer story about DEXes in general.

DeFi

There are many interesting and exciting DeFi projects launching soon on Terra (and some already here). Since Terra has a strong DeFi emphasis, there are a lot of developments in this space, from yield optimizers to farming protocols (not like dirt-and-plants farming obviously) to asset indexes and more. It gets pretty wonky.

NFTs and More

There are people building NFT projects and more consumer-oriented projects as well. As I mentioned earlier in this story, Terra has been taking the path of directly competing with a lot of other layer-1 blockchains rather than focusing on its international stablecoins. While I personally feel that this strategy will only be viable for the short-term, I do think the introduction of more consumer products on Terra is a good thing.

What’s Coming Next

So now that you’ve gotten a little introduction to Terra and its ecosystem, what’s next? Well, as I mentioned, I’m preparing a 4-part series on Terra’s ecosystem so that we can go a little deeper into why I love this project. So come join the Digital Native Citizen newsletter to make sure you get those stories when they come out.

As I am not a registered fiduciary agent, none of my advice is legally binding in any way, and choosing to follow or not follow it is a responsibility that lies squarely on your shoulders. Crypto is a volatile market, and a significant crash in values is a normal event in this space, just as a significant increase in values is. Treat the market as an irrational actor (which is what it is), buy the proverbial dip when possible, take some profits along the way, and enjoy the ride.