Update: The Terra ecosystem suffered a bankrun on UST and subsequently collapsed. Exercise caution if or when interacting with the projects mentioned in this article.
The Terra project is a layer-one blockchain
founded by Daniel Shin and Do Kwon. The Terra company was founded at the beginning of 2018 in South Korea and has been tipped as one of the most promising layer-1 chains on the market. Its LUNA token gained 17,000% in 2021
! Terra and its native CW20-token LUNA are the foundation for UST
, a decentralized algorithmic stablecoin
not backed by fiat reserves.
UST is the single most important product of Terra and will likely make or break the success of the entire ecosystem. Before it started serving as the backbone for the Terra DeFi
ecosystem, UST was already integrated with payment systems like Chai in Korea and Memepay in Mongolia.
If you want to learn more about the project, please visit Terra Academy
and play around with its Terra Scan
to identify your transactions.
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LUNA is Terra's native governance token
that serves as the backing for its UST stablecoin
UST is not backed by a fixed amount of fiat dollars like other stablecoins such as USDC
. Instead, the supply of LUNA acts as the backing for UST
and absorbs changes in UST demand by regulating supply. The fundamental mechanism is that users can always exchange 1 UST for $1 worth of LUNA.
Assume there are 1 million UST in the market, backed by $1 million worth of LUNA. Let's say that UST demand rises, and it breaks its peg
to the upside, with 1 UST worth more than $1. Terra mints new UST by burning an equal amount of LUNA to restore the peg. Conversely, if UST demand falls and the peg is broken to the downside, UST holders can exchange their tokens for $1 worth of LUNA until the peg is restored.
In other words: the supply of LUNA contracts if demand for UST rises, causing the price of LUNA to rise. The supply of LUNA expands if demand for UST falls, causing the price of LUNA to fall. As a result, volatility is shifted from UST to LUNA.
In the long run, increased demand in UST will lead to a contraction of the LUNA supply and an increase in demand for LUNA. As new dApps
appear on Terra and more integrations with other blockchains through bridges
are created, awareness and demand for UST should rise, and with it, the demand for LUNA, leading to a subsequent reduction in LUNA supply.
The Bull Case for UST and LUNA
The bull case for the ecosystem is the mass adoption of UST across the cryptocurrency space, leading to a price surge in LUNA. If LUNA in the future is worth $1,000 or even $10,000 or more, its supply curve will be highly inelastic since burning 1 UST at a price of $10,000/LUNA burns a fraction of the LUNA it does now.
This is the goal of the LUNA project, which has become even more explicit with last year's Columbus-5
upgrade. After the upgrade, the seigniorage LUNA incurred to mint UST is burned and no longer allocated to a community treasury. This results in an even quicker burn of LUNA as long as the demand for UST keeps expanding, similar to the London Hard Fork
Risks for UST and LUNA
If demand for UST declines for some reason, LUNA will suffer as a result. That is exactly what happened following the Wormhole hack
that saw $320 million in Wrapped Ethereum
stolen. The price of LUNA has plummeted 50% from its all-time high of around $100 after panic gripped the market in the aftermath of the hack. Although the Terra Station and the Terra Station wallet were never compromised, the damage to the reputation of Wormhole - the Terra bridge to other blockchains - took a serious hit.
The Terra ecosystem has several notable protocols based on the UST stablecoin, particularly in the DeFi space.
is a money market protocol
similar to MakerDAO
on Ethereum. It offers one of the highest stablecoin yields at 19.5%, and users can also deposit synthetic assets not native to Terra like bETH
. In a way, Anchor could almost be called the Terra bank due to its key role in the Terra project.
Anchor has three essential use cases
: bonded assets, money market, and loan liquidations
Bonded assets are tokenized stakes on the Terra blockchain
. Token holders receive block rewards for the bonded asset but benefit from its fungibility and transferability. In principle, any blockchain with smart contracts
supports bonded assets, sometimes also called wrapped assets.
Its money market is defined by a pool of LUNA deposits that can be used for generating overcollateralized loans
. Borrowers add collateral to the liquidity pool
- either UST or a bonded asset - and receive their loan in return. An algorithm dynamically calculates the interest rate based on the pool's utilization ratio.
If a loan falls under its loan-to-value ratio (LTV), it will be liquidated. A loan's LTV depends on the collateral. Anchor targets to reach its so-called Anchor Rate as an interest rate objective. To do so, its smart contract dynamically divides block rewards from collateral bAssets between borrower and depositor.
is a synthetic asset
protocol that allows crypto assets and traditional financial assets to be traded synthetically.
Mirror creates mirror versions of assets
like mETH or mBTC representing crypto-assets and other mAssets representing stocks or commodities. With UST, users can trade these mAssets, whose prices are determined through oracles
. Unlike traditional financial markets, Mirror does not operate on fixed hours, opening up arbitrage opportunities on weekends.
Users can also mint mAssets and take on a leveraged position, with a maximum allowed LTV ratio of 150%. That allows to farm mAssets and build a leveraged position in an asset an investor may be bullish or bearish on. Furthermore, users can employ delta-neutral strategies to protect themselves from asset price volatility and maximize their rewards in MIR.
is an automated decentralized exchange protocol that enables non-custodial liquidity and price discovery for any asset. It aims to be a liquidity black hole for liquidity on the LUNA project and beyond.
Astroport's key features are flexible pool types, dual liquidity mining, and ASTRO governance.
Flexible pool types expand on traditional AMM
s by creating a flexible architecture that allows pool types of any kind to create new pool types with minimal changes to the protocol code. In other words, this combines the features of all AMMs in DeFi.
Dual liquidity mining enables liquidity providers to use their capital more efficiently. For instance, yield farmers can engage in dual token farming of ASTRO and a third-party token: if liquidity is provided to the ANC-UST liquidity pair, farmers receive ANC and ASTRO.
Finally, ASTRO holders can stake their tokens in the xASTRO pool and receive a share of trading fees in addition to taking part in governance. Similar to veCRV in Curve
, xASTRO can also be locked up for longer to amplify governance power.
In summary, Astroport aims to combine the best features of different AMM protocols to advance the expansion of the Luna ecosystem.
is a gamified launchpad on Terra launching differed play-to-earn
games and gamified NFTs, and offering multi-asset staking.
Its various factions allow users to stake STT to increase their chances of winning an allocation to an IDO
. A gamified leaderboard tracks parameters like STT staked, times the tokens that are staked, and does social media scoring. Player activity is measured in Starterra Energy
, which also influences the chance to win an allocation. Consequently, competition on Starterra is at the same time intra-tier and inter-tier.
Starterra also provides gamified NFT integration. After connecting their wallet, players choose a unique nickname and avatar for their character. This character can also be upgraded with NFTs, coming in the form of skins like weapons, armor, creatures, or artefacts. Each NFT represents a utility that influences a player's chances to win an IDO allocation.
is a DeFi framework for principal-protected, yield-based products and services.
Pylon aims to incentivize long-term alignment between users and service providers by providing the technical toolkit necessary to readjust payments options. Long-term services that accrue value through a growing customer base are better rewarded by using Pylon's DeFi payments infrastructure.
For example, users can deposit UST to platforms that are integrated with Pylon and receive platform-specific rewards like
- Exclusive content
- No-fee memberships
- Project token farms
- Perpetual charity donations
- Arts patronage
- Rental services
- Principal-protected investments
After a subscription expires, the deposited principal can be withdrawn. According to explicitly specified conditions, yields generated from protocols like Anchor can also be allocated to service providers. Furthermore, Pylon Gateway is a decentralized project launchpad and crowdfunding platform similar to Starterra.
is Terra's native DEX
and a fully decentralized protocol for automated liquidity provision on Terra. Its mission is to "empower developers, liquidity providers, and traders to participate in a financial marketplace that is open and accessible to all." Similar to other decentralized exchanges on rival blockchains like TraderJoe
, investors can swap between different Terra-native assets in a non-custodial and decentralized manner.
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