I have been buying a big bag of Terra LUNA until it makes up the 2nd largest position in my crypto portfolio. I am very bullish on LUNA and here is why. This article will present a layman overview of what is terra luna in crypto and where is this heading towards.
1. What is Terra Trying to Solve?
The main problem in crypto is price volatility.
Even though crypto is more than a trillion market cap, how many of us really use crypto in our day-to-day lives except for investment and speculation? I guess you already know the answer to this.
What Terra wants to solve is to create a stable cryptocurrency that allows for the mass adoption of blockchain particularly in the e-commerce sector. Then you ask, don’t we already have all these stablecoins out there? USDT, USDC, Binance USD, DAI and etc. Why create another one?
2. Terra USD (UST) & The World of Stablecoins
Stablecoins can be largely categorized into fiat-collateralized, crypto-collateralized and non-collateralized.
2.1 Fiat-Collateralized Stablecoins
The first is fiat-collateralized. These are tokens that are issued with a 1:1 exchange ratio to a dollar or any other currency. For example, you have Tether which is a centralized stablecoin that pegs itself to the USD dollar. So 1 USDT is supposedly equal to a physical 1 US dollar note in their bank account.
But turns out is not that simple if you are aware of the Tether Fud and the controversies surrounding it. If not, I would highly recommend to check out the Defiant’s video explanation on it.
Fiat-collateralized stable coins are highly regulative and you need to handle token issuance, exchange services, deposit management and legal issues. To say the least, it is troublesome.
2.2 Crypto-Collateralized Stablecoins
The second is crypto-collateralized. These are stablecoins that use the value of a cryptocurrency as collateral. For example, you have DAI from MakerDAO. DAI is also equivalent to 1 USD and people can borrow DAI by depositing ETH as collateral into MakerDAO.
But Ethereum price is also volatile and what happens if your collateral (ETH) crashes too fast? That is what happened in March 2020 when MakerDAO had a big margin call putting the entire ecosystem at risk. Crypto-collateralized stable coins have their own risk and that is the collateral is already a risky asset, to begin with.
Adding to that is the issue of scalability. There is a supply-demand mismatch as those who supply DAI are speculators who want to leverage on ETH. And those who demand DAI are those who want to participate in all the yield farming DeFi protocols. When demand for Dai exceeds demand for leverage, it creates a situation where Dai trades for a premium and emergency measures are needed to restore the peg.
2.3 Non-Collateralized Stablecoins
Finally, we have non-collateralized stablecoins (algorithmic stablecoins) and this is where Terra fits in. Terra created its own stablecoin called Terra USD (UST) and it stabilizes price through an algorithm without collateral.
The target price of UST is maintained by adjusting the supply. Here is how it works in a nutshell.
When there is a high demand for Terra USD, UST will be trading at above a dollar. Terra will increase new supply of UST to bring down the price back to a dollar. Vice versa, if demand for Terra USD falls, the protocol buys back Terra to reduce supply and bring prices back up. The elastic supply model expands and contracts based on demand and arbitrage opportunities will incentivize the price to be at US$1.
3. What is Luna?
But wait, so where does all these new UST come from? What is the collateral here? That is where the LUNA token comes in. To mint a new supply of UST, you have to burn LUNA and swap them to UST. Likewise, if you want to mint LUNA, UST is bought back and burned.
Every time a transaction is made, fees are paid to LUNA holders. LUNA accrued value is then used to collateralize Terra value in the ecosystem.
The Terra protocol runs on a Proof-of-Stake blockchain. This means miners stake their native cryptocurrency, in this case, LUNA, to mine transactions on Terra blockchain.
Apart from governing the security and stability of Terra, miners in the Terra ecosystem also absorb short-term volatility by being willing to take up counter-party arbitrage offers.
In return for governing the security and stability of Terra, LUNA stakers are rewarded long-term for their work in the form of transaction fees and seigniorage. Seigniorage in defined = value of the newly minted currency – the cost of issuance. In our world, that would be the cost of printing money. (ink, paper, electricity fees and etc.) But in Terra, the cost of issuance is $0.
What happens when the government prints money? They use them to build bridges, roads, infrastructures and etc to win votes. In the same manner, what happens when you have newly minted UST in the ecosystem? Terra re-invests them back to the consumer in the form of discounts and kickbacks.
4. Terra Alliance – How is Terra Luna Different?
What makes Terra Luna uniquely different from the thousands of other “crypto coins” out there is they have real adoption in the real world.
Terra Alliance is a group comprising 15 e-commerce and payment companies from Korea and Southeast Asia. Even Carousell is part of it. The vision is to help drive adoption for Terra stablecoins and the Terra ecosystem.
Most crypto coins are trying to bring crypto to existing crypto users by making things better. Some are trying hard to convert non-crypto users to crypto users. But the best projects are those that bring crypto to existing products and services that consumers are already using, without them having to know anything about blockchain. That is Terra’s competitive advantage.
Prior to founding Terra, the Co-Founder Dan, founded extremely successful companies like TMON (Alibaba of South Korea) and CHAI (Softbank-backed).
4.1 What is CHAI
CHAI has 2.3 million users and generates 90,000 daily transactions or US$1.6million in daily payments. It has already integrated 14 of the top 15 banks in Korea and the front-end UX looks similar to any payment apps you have seen. There are no public addresses, private keys, transaction reference and all payments are done in fiat on the user end.
However, what goes on in the backend is CHAI is using the Terra blockchain to solve merchants’ pain point. In Asia, traditional payment gateway takes anyway between 3-14 days and Terra blockchain takes 6 seconds for every transaction block. Transaction fees charge only 0.5% to 1.3% while traditional payment gateway is about 3%.
Will merchants switch to use CHAI? Yes, it is cheaper and faster. Will users use CHAI? Yes, it is cheaper as there are more discounts and cashback. The user interface is sleek and convenient. At this rate, users are only going to grow and this creates a stronger network effect which ultimately translates to higher adoption of Terra stablecoins.
CHAI is also gaining traction in South Korea as they did a Series A funding of $15m in Feb 2020 and a Series B funding of $60m in Dec 2020 from Softbank Ventures, SK Network and other partners. Its fundamental metrics are growing fast and CHAI has plans to expand outside of Korea.
In short, millions of users in Korea are already using CHAI and Terra and all these values ultimately accrues to LUNA hodlers and stakers.
4.2 Terra’s Market Strategy
Terra is following the footsteps of Alipay. Alipay first integrates with Taobao, then they give out mass discounts and promos to acquire users and drive adoption. Next, they introduce credit lending and finally, they transform into this fintech giant.
In the same way, Terra already has integrated Terra stablecoins into many of these e-commerce apps, then they are giving more discounts and cashback. But where do they get the subsidies from? Cash burn? No. It is from the newly minted UST through seigniorage as mentioned above. So when do you mint UST and increase supply? Answer when UST demand is too high and the algorithm tries to bring prices down.
This creates a feedback loop where more people uses CHAI, more demand for UST is created, more UST is minted, more cashback and discounts are given back to users which in turn drives more adoption on CHAI. This is known as Terra’s “fiscal spending”.
In summary, Terra has a huge alliance backing them, they have real products, millions of users and they are piggybacking on the momentum. Their goal right now is to attract mass adoption before introducing more DeFi features like lending and borrowing.
5. What is Mirror Protocol?
An important part of Terra’s ecosystem is their decentralized stock market called Mirror.
I remembered selling my stocks, have to wait T+2 days to receive cash settlement and pay a $25 commission. Plus SGX not open on public holidays and weekends. This is the problem of intermediaries. They are slow, inefficient and costly.
Meanwhile, I sold my fractional 0.015411 TSLA shares on mirror protocol. Receive cash immediately at a transaction fee of $0.08 cents and I can settle 24/7 anytime any day.
It is immediately clear what pain points Mirror is trying to solve. So what is Mirror protocol?
Mirror is the equivalent of Synthetic on Ethereum. You can create synthetic assets in crypto using UST as collateral. This means I can mint $100 worth of TSLA share by depositing $150 UST as collateral. This newly minted TSLA fractional share will mirror the price movement of the real TSLA stock using data oracles (BAND).
Note that my TSLA share here is not backed by anything except the collateral I put in. It is just a synthetic asset that mirrors the price movement of TSLA. That’s all.
5.1 Mirror – The Decentralized Stock Market
The idea here is to allow anyone from anywhere in the world to participate in the price action of the stock market in a decentralized manner 24/7. Someone from Africa can now buy $100 worth of TSLA and participate in the US stock market without having to submit cumbersome verification documents. And I can make payment of my 0.3825 MSFT shares to someone in Russia directly. No banks, no intermediaries, just the internet.
The possibilities here are endless. Now that it is a fungible and transferable asset in the crypto world, you can imagine using it as collateral to borrow money, lend them out and provide liquidity, insurance, payment and etc. And yes you can earn dividends by providing liquidity of your shares (e.g. TSLA) into an automated market maker pool. When people make any trades for mTSLA/UST pair, you earn fees based on the ratio of your stake in the pool.
5.2 Mirror Stats
Mirror only launched in Dec 2020 and in just 3 months, their total value locked (TVL) hit $1 billion and $485 million in liquidity as of writing today. This has generated a massive massive demand for UST so much so that the entire Terra ecosystem is experiencing a big shortage of UST.
Remember what happens when the demand for UST goes up? New supply of UST has to be minted to bring prices down and that means LUNA has to be burned and converted to UST.
New proposals are passed and parameters are adjusted because the demand for UST from Mirror has totally outstripped supply. This leads to even more LUNA being burnt to mint more UST and you can imagine what happens to the price of LUNA when supply falls. It moons.
However, Mirror as a new project is not without its problems. The key issues are mirror assets are trading at a premium (1-3%) to underlying stocks. This is partly because you can earn yields by providing liquidity for your stocks and collect fees. Other reasons also include the demand for synthetic assets on Mirror, market makers bringing prices back to peg as well as the UST premium.
There is a proposal of changes for Mirror V2 launch to resolve all these issues. By then, you would see even more adoption for Mirror to buy/sell fractional stocks in crypto much cheaper and faster, yet enjoying the same price movement.
6. What is Anchor Protocol?
Anchor is a savings protocol that is going to launch anytime in the next few days. Watch closely. Terra believes that the path to mass adoption for DeFi starts with savings. After all, that is the lowest risk segment. In the US alone, the market size of the savings account is approximately $13 trillion. Imagine just capturing 0.1% of it. The fixed income market in crypto is still largely underserved.
Why do another savings thing again? Doesn’t Compound, Aave, Maker, Curve and all already offer such components? The problem with the existing savings protocol in crypto is due to the cyclical nature of stablecoin interest rates. One day it goes up, the next day it goes down, depending on the demand for the stablecoins or the underlying tokens.
Crypto is still lacking a stable savings account where depositors don’t have to worry about fluctuating APR %. Anchor is going to solve that. It stabilizes the deposit interest rates by passing on a variable fraction of block rewards from collateral assets to the depositor. So where does Anchor gets the money to pay out depositors? The answer is it comes from block rewards from major proof-of-stake blockchains.
6.1 How does Anchor works?
So you can think of them as a middleman here. There is a group of people who wants to save and earn interests and another group of people who wants to borrow money. Savers and borrowers. Those who want to borrow put in their staking tokens as collateral. These staking tokens generate yields for the depositors. Then borrowers get the credit from depositors who deposited their Terra USD. In this way, both needs of the groups are met.
Is the principal of the depositor guaranteed? Yes. How so? Since borrowers have placed collaterals to borrow Terra USD, these collaterals have value. In the event when the loan is at risk, the borrower’s collateral would be liquidated to protect the principal of the depositors.
The reason why luna price pumps so much is that the supply is going down. The supply is going down because there is a massive demand for UST causing the need to increase the supply pool by burning luna.
Now imagine what happens when Anchor is launched. What demand will it generate for UST knowing that you can get decent stable yields with relatively low risk?
If you are still looking at bonds, fixed deposits and the likes that fall under the cash management savings category, it is time to open your eyes and expand your horizon. Stop cutting yourself short with those undeserving menial rates. The difference in yields would force a big migration of savers into Terra Anchor. Especially when yields everywhere now are depressed in a low-interest-rate environment.
7. Tokenomics of LUNA
When we talk about tokenomics in crypto, the key thing to look at is just the demand and supply. Look for those tokens that have very high demand yet very low supply.
And most importantly, look for tokens that have a sound model which generates actual revenue and value. There are many tokens out there that pay you staking rewards through inflation (minted new tokens). Luna rewards come from actual transaction fees from real users. Find things that people are actually using it. You will be surprised how rare this is in crypto.
7.1 Supply of Terra Luna
The supply of luna is dependent on the demand for UST as described earlier. That is how algorithmic stablecoins work. If demand for UST is high, you can expect the supply of luna to fall as seen above. There isn’t much Luna to go around as the circulating supply is already left with 400m and 80m tokens have already been burnt. This is just the UST shortage from Mirror.
In the most recent proposal, there are plans to change how seigniorage is going to be allocated. Previously it was divided into 3 parts: permanent burn, staking and community fund to fund various initiatives like discounts/cashbacks in Terra ecosystem. However, too much supply of new UST is generated and are overfunded in these areas. Hence the short-term solution is to burn 100% of them. This will cause even more shortage of Luna supply in the near-term.
7.2 Demand of Terra Luna
Then the next question is there demand? Mirror V2 is coming out and Anchor protocol is coming. Mirror has already attracted such great demand in just 3 months and it is not even listed on Binance yet. Everything is still in the early phase and they are just getting started. But you can be sure they found a product-market fit and the demand is there, it is massive.
I expect Anchor to create an even bigger excitement as most people would want a higher yield for their savings. This is excluding all other protocols that are still in the works like Alice and Spar.
In short, demand for UST is strong as people want to buy stocks on mirror or save on anchor in the future. This resulted in luna supply falling as more luna now needs to be burnt and minted into new UST to increase the supply pool and bring down the premium.
At the same time, demand for luna is also high as investors want to be stakeholders in Terra ecosystem and they want to collect airdrops for Mirror token and Anchor token. Hence, Luna moons.
You can think of Luna as a capital asset that generates value from everything that is built and developed on top of Terra. And by staking Luna, you receive dividends/rewards. Here is the formula for it.
LUNA staking = Chai TX fees + “Seigniorage fees” + Swap fees (after Columbus-5) + MIR/Anchor Transaction fees + MIR airdrops + Anchor airdrops + Spar airdrops + More airdrops in future
8. Who are the Investors for Terra (LUNA)?
Coinbase Ventures invested in them. Binance Labs invested in them. They don’t invest in hundreds of coins out there and hope to strike a few multi-baggers. Binance Labs only has 6 tokens and Coinbase Ventures 18 tokens under their portfolio according to Messari data. Terra has passed very careful due diligence and evaluation criteria that these VCs have. What do they know that you don’t?
During an interview with IvanOnTech, the question was asked why Binance is interested in Terra? The reply was a stellar team and a strong use case with existing user adoption. The founders of Terra comes from very successful track records and are entrepreneurs. Daniel Shin graduated from Wharton School of Economics and have built unicorn companies in Korea such as TMON & CHAI. Do Kwon graduate from Stanford in computer science and works at Microsoft as an NLP Engineer. He also made it to the Forbes 30 under 30 and later founded a startup called Any-Fi which does P2P telecommunication solutions.
Mike Novogratz’s Galaxy Digital invested $25m in them in Jan 2021. They invest in crypto projects in the sandbox environment and he calls Terra luna the guppy that jumped out of the fish tank in 1 of the interviews.
Pantera Capital, Kenetic Capital and Hashed also invested in them. These are all well-known VCs in the crypto space. And just last week, an investor bought $130m worth of Terra luna tokens. The CEO confirmed that it was done in a single trade OTC deal, by a single American buyer and the buyer is well-known. And also recently, Mark Cuban tweeted that “I’m very familiar with Terra”. He followed Anchor Protocol even before it is launched. This guy knows about Luna Terra. Given that he is a DeFi/Ethereum maxi, I am not surprised if the buyer is Mark Cuban.
9. How to buy Terra Luna?
If you are in Singapore/Asia, the Luna token is not listed on Coinhako or Binance SG, you have to buy it from Binance. That means you need to get USDT as Luna is paired in USDT. There are many ways of getting USDT in Singapore. You can go through Binance P2P directly or follow one of the methods in my previous guide for buying altcoins.
If not, the simple way would be, go to Coinhako, buy Zilliqa (ZIL). Transfer Zil to Binance. Sell your Zil for USDT. Buy Luna using USDT. Create a wallet at Terra Station. Send your Luna from Binance to your Terra wallet. Finally, stake them, keep calm and collect dividends/airdrops. If you need a guide on Coinhako, do refer to the post here.
Meanwhile, wait for Luna to be listed on Coinbase. This will be a huge catalyst in terms of price movement. Coinbase ventures invested in Luna, do you think they will list Luna eventually?
9.1 How to buy Mirror (MIR)?
For those who are interested in the decentralized stock market, you can own a share of it by staking your Mir tokens. Mir is currently not listed on Binance yet, only on KuCoin and uniswap. Alternatively, you can buy UST to buy MIR. Where do you buy UST? Currently, it is only on Uniswap and Bittrex. But a simpler way would be to just buy Luna and swap them into UST on Terra station. Then use your UST to buy Mir. Finally, stake them, keep calm and collect dividends as you are now own a share of the decentralized stock market.
Again, wait for MIR to be listed on Binance. This will be a huge catalyst in terms of price movement also. Binance ventures invested in Luna, do you think Mir (a part of Terra) will be listed on Binance eventually?
10. Summary of Terra Luna
Terra USD is still extremely early. It just overtook Paxos Standard in ranking and the next is Dai. The past 30 days growth has been insane (200%+ increase) and this trend for UST is likely to continue or even accelerate faster. The market cap of Terra USD is currently only at $800m, Do estimate that it would hit $10b by end of the year.
In summary, if you want to think about Luna token valuation, think about the demand for their stablecoins. Anchor is for savings, Mirror is for investments, Chai is for payments and Terra is for currency. Luna burns during Terra stablecoin expansions and prints during stablecoin contractions. A bet on Luna is a bet on the growth of the Terra stablecoin ecosystem. Think about supply and demand.
Imagine an economy where there is too much money printed, too much money circulating around. That is our world today and this has accelerated the road to hyperinflation and devaluation of the currency. Now imagine an economy where there is a shortage of currency and the printer is unable to keep up with the demand of that currency. You have to keep burning and burning more luna to fill that demand gap. That is the Terra economy in crypto.
I think Luna has found a MPMF.