Hoo Research ｜A Research of Terra Ecology
Author: Hoo Research
Abstract: Terra ecology provides a decentralized algorithmic stablecoin system, with Terra’s core objectives of “price stability” and “wide adoption”. TerraUSD (UST) has surpassed DAI to become the fourth largest Stablecoin in terms of market capitalization, Terra is expected to become the most growing public chain, this article will read about Terra from the perspective of Terra ecology, core products of Terra ecology, etc.
1、What is Terra?
Terra is a blockchain protocol that supports a stable programmable payments and open financial infrastructure, backed by a basket of fiat-pegged stablecoins that are algorithmically maintained stable by their native token, LUNA. At the core of the Terra stablecoin solution is a smart contract that adjusts the supply and demand algorithm to automatically increase or tighten the supply of money to maintain price stability, while its anchor A basket of fiat stablecoins can be fungible on the chain.
To better understand Terra, let’s first understand the current state of the stablecoin market. Currently, stablecoins in the market can be divided into three main categories: fiat pledged stablecoins, crypto over-pledged stablecoins, and algorithmic stablecoins. Currently, fiat pledged stablecoins issued by centralized entities dominate the market, with USDT, USDC, and BUSD accounting for approximately 96% or more of the entire stablecoin circulation, with USDT accounting for the largest daily trading volume. Centralized stablecoins are under regulatory pressure and lack transparency, and Tether has not been audited once since its inception. The shortcomings of centralized stablecoins also create uncertainty in the market and run counter to the decentralization of the crypto world.
US Terra (UST) proposes a new solution that increases the resilience of the crypto ecosystem by decentralizing reliance on centralized fiat pledged stablecoins (USD Tether, USD Coin and Binance USD) and truly decentralizing DeFi applications. footprint Analytics data shows that the current Terra chain has a record $20.68 billion DeFi lock-in and is ranked #2 among public chains. This means that the market demand for decentralized stablecoins is surging and UST is expected to be the leading decentralized stablecoin.
Note: The statistics are as of December 25, 2021, and the actual TVL is subject to change.
Terra’s website shows that there are currently 71 projects in the on-chain ecosystem, but the three main core products are the LUNA-based stablecoin protocol, the DeFi savings protocol Anchor, and the Mirror Protocol, a synthetic asset trading platform.
2. Terra Eco’s LUNA, Anchor, Mirror
2.1 LUNA-based stablecoin protocol
Terra Eco uses a dual token design, with LUNA as the governance, pledge and verification token; and UST as the stablecoin pegged to the native USD. Specifically, it can be understood as follows.
● Terra’s ecological stablecoin UST: Terra offers stablecoins anchored to fiat currencies, including TerraKRW, TerraMNT, TerraUSD, TerraSDR and other stablecoins, with TerraKRW, a stablecoin anchored to the Korean Won, being the main market, with approximately $63 million issued so far.
● Terra’s stablecoin engine token LUNA: token collateral for stablecoins maintained in the ecosystem through algorithms, with system fee proceeds going to LUNA token holders.
Terra chain is based on PoS consensus mechanism blockchain, maintaining security by staking LUNA, while LUNA and Terra stable coin maintain stable coin value through arbitrage mechanism. LUNA captures the value of the whole chain, and as the use of UST becomes popular, the value of LUNA will increase, further consolidating the stability of UST.
Pledging LUNA and delegating to verification nodes can earn Staking rewards, pledging requires a 21-day unlocking period, Staking
The reward mainly includes the system’s transaction fees, minting fees and prophecy rewards in three parts.
● Handling Fee: refers to the fee for transferring and trading Terra stablecoins, which is the main source of Staking rewards and will increase with the increase of trading volume and revenue size of the system.
● Minting fee: refers to the minting fee of 0.1%-1% that needs to be paid to the system for participating in minting Terra. According to the whitepaper, the single fee is capped at 1 TerraSDR (approximately $1.39) and the minting fee is rewarded in the form of Terra stablecoins.
● Prophecy reward: refers to the reward that Terra validators need to earn by voting on the exchange rate between LUNA and the target fiat asset, this mechanism actually acts as a price prognosticator and will also be penalized if the voting error is too large.
According to station.terra.money blockchain browser data, 37.2% of LUNA tokens are currently in pledged status across the network. As the price of LUNA rises and the number of LUNA tokens on the books decreases, Staking’s yield decreases with it, currently standing at 7.94% annualized.
The above pledge data shows that the design of LUNA pledge reward is closely related to the development of the whole ecology. As the issuance and trading volume of Terra Stable Coin becomes larger and larger, the variety of Terra Stable Coin becomes more and more diverse, and the verifier becomes more and more professional, the pledge revenue reward of LUNA will become higher and higher. At the same time, as the usage of Terra Stable Coin and the types of Terra Stable Coin increase, more LUNA tokens will be burned to mint Terra Stable Coin, and the supply of LUNA tokens will decrease and motivate the price to rise.
Coingecko data shows that LUNA has a market cap of $31.29 billion surpassing Boca (DOT) to rank ninth in the cryptocurrency market.
Anchor’s core mechanism uses a money market structure to interface between depositors and borrowers. However, in contrast to most current money markets in the cryptocurrency industry (such as Aave and Compound), Anchor’s architecture is designed specifically for depositors to provide them with a more stable interest rate. To achieve this goal, Anchor is composed of several different components.
● Depositors: From a depositor’s perspective, the Anchor experience is simple; the Anchor platform offers depositors of stablecoins on the Terra platform a fixed rate called the Anchor rate, which is initially set at 20% and can be adjusted in the future based on governance. The appeal of this product for depositors is clear, as Anchor will be one of the leading platforms for predictable passive returns, as opposed to the volatility currently prevalent in cryptocurrencies.
● Borrowers: One of the most important design decisions regarding the Anchor Money Market is that the protocol only supports blockchain pledged asset derivatives that are common knowledge to mainstream PoS as pledged assets. The reason for this is that, as naturally yielding assets, these blockchain-generated rewards are more consistently strong and ensure that depositors’ Anchor interest rates are maintained at a certain level.
In the Anchor system, borrowers deposit pledged derivatives (called bAssets in Anchor) from each blockchain as pledges in exchange for the ability to borrow (at a subsidized interest rate of potentially 0) and Anchor token (ANC) rewards by sacrificing the pledged proceeds from the deposited assets. The pledge proceeds generated by these token assets can in turn be used to subsidize the interest accrued by Anchor depositors. Initially, Anchor will only accept bLUNA (representing pledged LUNA tokens) as pledges, and will later expand to accept pledged asset derivatives from more mainstream PoS blockchains, including Ether, Polkadot, and Cosmos.
Stabilization mechanism: However, for the above system to work properly, a certain balance must be maintained between depositors and borrowers. Otherwise, two unfavorable situations may arise. The first and most important adverse situation is the situation where the pledged proceeds generated by bAssets in the platform are not enough to cover the depositors’ Anchor rate, i.e. the accrued interest. Another scenario is that there are too many borrowers on the platform, which means that borrowers have to pay a premium over the servicing fee. To mitigate the possibility of these scenarios, Anchor introduces a stabilization mechanism that works as follows.
● If the pledge yield (the pledged return generated by the borrower’s pledged assets) is higher than the target yield (the interest to be paid to the saver), two things happen.
1. A portion of the excess earnings will be stored in the Earnings Reserve in UST terms
2. Reduced ANC rewards for borrowers by 10% per epoch per week
● If the pledged return is lower than the target return, two things will happen.
- Replenish the desired amount from the “yield reserve”.
- Increase the ANC incentive for borrowers by 1x per epoch per week until the actual yield converges to the target yield.
According to Anchor’s official website, the total locked-in value is currently approximately UST10.38 billion, which is split between total deposits of approximately UST5 billion and total collateral of approximately UST5.3 billion.
Anchor also has a governance token, ANC, which is used in a liquidity mining program and pays APRs to borrowers over time. These rates fluctuate constantly based on borrowing demand and have been as high as 400% in the early stages of the agreement. The ANC token itself can be used for unilateral fixes and ANC-UST LP pools to generate additional revenue.
Anchor currently has a TVL of $8.45 billion and is in 9th place on the DeFi protocol TVL list. From the above data charts, it can be observed that as the inflow of funds continues to grow, the interest rate for mining will gradually decrease and Anchor’s lending mining will end when the ANC tokens are exhausted, at which point the deposit rate model returns to the level line of common liquidity pool lending platforms. In the future, Anchor’s stable 20% interest rate may be compensated by the economic model through Terra ecology and also through the linkage of other projects.
2.3 Mirror Protocol, a synthetic asset trading platform
Mirror Protocol is a DeFi protocol built on a smart contract on the Terra network that creates synthetic assets called mirror assets (mAssets) also known as synthetic assets. mAssets aim to give traders anywhere in the world open access to price exposure without the burden of owning or trading physical assets. The casting of mAssets is decentralized and is performed by users across the network by opening positions and depositing collateral. mirror ensures that there is always enough collateral in the protocol to cover mAssets and also manages the mAssets market by listing mAssets against USTs on Terraswap. Synthetic tokens for stocks, futures, exchange-traded funds, and other assets can be minted and traded through Mirror Protocol. Users can trade a variety of global header assets directly through Mirror Protocol, with 27 synthetic assets currently live.
Mirror has built an ethereum bridge on top of the original network, allowing users on ethereum to also use Mirror’s services, and Mirror’s synthetic assets to circulate on ethereum. mirror has also recently completed a bridge to the coin smart chain, bringing stock synthetic assets to the coin community, and is now available on the decentralized exchange on coin smart PancakeSwap is now able to trade synthetic tokens of Google and other stocks on the decentralized exchange on Coin Smart.
MIR is a native token issued by Mirror Protocol, with a total of 370,575,000 issued and distributed over four years. MIR allows holders to participate in governance votes and governance proposals, and rewards users with additional MIR tokens for building new governance votes and actively participating in the governance of MIrror Protocol. On the official website, we can see various votes from the community, including votes for events such as Starbucks and Coca-Cola.
In addition, Mirror is currently enabled for liquidity mining, a mechanism that brings additional revenue to what is otherwise a zero-sum game market and helps immensely with Mirror’s initial rapid uptake, but the value capture of MIR tokens and the sustainability of this model remains to be seen.
3. Terra’s mobile payment application Chai
Terra ecology’s golden triangle (LUNA, Anchor, Mirror) provides a complete ecological closed loop for the market, but as a stablecoin ecology, what can really realize its value is real-world applications, and only with a wide range of usage scenarios and an increasing number of users can the stablecoin show its value. terra launches real-world payment-type applications in 2019 -CHAI, CHAI focuses on the Korean market. CHAI has a fiat payment gateway regulated by the Korean government that connects to about 16 major banks, and the total number of registered users of the CHAI app is currently about 2.51 million.
CHAI streamlines checkout time and reduces processing fees to 0.5% by using the Terra blockchain. Merchants are able to easily integrate Chai into their POS terminals through a Stripe-like SDK checkout service. Currently over 1,700 merchants in Korea have integrated Chai, and similar to the main functions of a bank (clearing transfers and payments), CHAI allows merchants to easily settle transactions and users to receive discounts or points back. With a fee of 0.5% lower than credit card transactions (2–3%) and the timeliness of settlement, CHAI already has 5% of the Korean population as total users.
In addition, Terra’s two founders both come from the Internet business field and have accumulated considerable business resources, and its payment alliance Terra Alliance includes many leading Korean and Asian e-commerce companies. In addition to CHAI, other payment applications in the Terra ecosystem include Kash, MemePay, PayWithTerra, BuzLink, and others. The strong background of business resources provides a strong impetus for CHAI’s growth and provides fresh blood for its stable circulation.
CHAI facilitates the development of Terra ecology, while the golden triangle of Terra ecology creates a virtuous cycle in the financial scene. When the market is in a bull market, investors will overall flow to Mirror to invest in synthetic assets, when the market tends to bear market, for stability, funds will mainly flow to Anchor to earn stable returns, both will stimulate the market demand for stable coins, which will in turn drive the price of LUNA to rise due to the tightening of LUNA, and the price growth of LUNA will also feed back to Anchor to increase the leverage of borrowing, which can borrow More UST assets will flow into Mirror and Anchor again, driving the rapid growth of the Terra ecosystem.
4. Other protocols on Terra chain
In addition to the above fist products, other products of Terra are also under continuous development. According to the economic system announced on Terra’s official website, about 71 projects in Terra’s ecology have been included, and the ecology is being gradually improved.
Last week, Terra Name Service, the Terra eco-domain service, announced the issuance of TNS with a total of 100 million pieces and a 17.7% airdrop to eligible participants who have interacted on Terra and met a certain amount to receive the airdrop. Many users who stepped short of the TNS airdrop have thus begun to look at other potential airdrop agreements on the Terra chain.
In addition, some of the more noteworthy GameFi games on the Terra chain are the following.
● Derby Stars
Terra is a Play to Earn horse racing game in which players can upgrade and breed as well as trade horses and earn rewards in cryptocurrency. In addition, players can own not only horses but also land, earning additional income by becoming a rancher. The NFT pre-order for Derby Stars horses is currently complete, and horses purchased in the pre-order will be marked as ORIGIN and will have a higher rarity than horses acquired through trading or breeding later. On the community side Derby Stars Twitter currently has 20.4k followers and Discord has 33.4k followers, which is a certain amount of buzz on Terra.
● LUNAverse
LUNAverse is a 3D metaverse digital world for DeFi and NFT and Gaming on Terra, powered by Cesium and Unreal Engine, creating attractive 3D cities for players with ultra-high resolution models that can be easily accessed by adventure lovers and gamers as well as crypto enthusiasts. In-game players can also own and develop as well as sell and rent out NFTs as buildings for profit. LUNAverse is currently opening an ID0 whitelist campaign that will offer 1,200 whitelist slots, where selected users will have the opportunity to purchase LUV tokens worth at least $333 in UST dollars.
● Terra World
Terra World is a meta-universe of business services on Terra that provides users with the business features of a comfortable virtual office where anyone can easily customize virtual spaces for a variety of businesses, including finding jobs and building capital and creating companies.
● Deviants Factionz
Deviants Factions is an online collectible NFT card game on Terra in which players are divided into 4 factions, each winning battles through their own unique strategies. The game requires players to use one HQ card and 8 other character or tech cards to destroy their opponent’s HQ while defending their own, and the player whose HQ is destroyed loses the game.
● Terra Unicorns
Terra Unicorns is a Play 2 Earn NFT fighting game on Terra, through the use of limited edition Unicorns NFT to fight, while supporting IOS and Android versions of the handheld game will also be online one after another.
● NIPTerra Cats
NIPTerra Cats is an NFT game on Terra where players can cast NFTs of different cats to fight in the game to get the corresponding rewards.
● StarTerra
StarTerra is Terra, a GameFi project launch platform that combines guaranteed jackpots and lottery jackpots to offer IDO services to high quality games where players can participate in IDO and receive airdrops.
● PlayNity
StarTerra is Terra, a GameFi project launch platform that combines guaranteed jackpots and lottery jackpots to offer IDO services to high quality games where players can participate in IDO and receive airdrops.
● Riviera
Riviera is a metaverse project on Terra and a community GameFi gaming platform where players can pledge official RIV tokens to share in the growth of the platform and vote on the next games to be developed on the platform.
● Duel Dojo
Duel Dojo, a GameFi gaming hub on Terra designed for gamers, creates an in-game circular economy for the platform by leveraging aUST and NFT technology, a stable revenue asset across the IBC chain.
Summary
Although Terra’s stablecoins (including the UST pegged to the U.S. dollar) are now performing well with record high TVLs and a growing trend of decentralized stablecoin algorithms. However, no one can predict whether Terra’s stablecoins can truly withstand the high volatility of cryptocurrencies. It will take time to further verify whether the Terra ecosystem can survive the bulls and bears and be tested by the market.
References:
- Understanding Terra LUNA’s UST Stablecoin Peg & Common Misconceptions
https://www.youtube.com/watch?v=HL8tcVHyHMM
- Terra station https://station.terra.money/
- How does Anchor Protocol generate 20% yield? and how sustainable is it?
https://www.youtube.com/watch?v=IKUgXiYFCsc&t=359s
- UST (Terra) Stablecoin Adoption Critical for the Crypto Ecosystem
- From centralized to decentralized, how will stable coins evolve?
https://cointelegraphcn.com/news/how-will-stablecoins-develop
- Terra Ecology Inventory
https://medium.com/@edwardyw/terra%E7%94%9F%E6%80%81%E7%9B%98%E7%82%B9-1f2e9607160f
Risk Warning
All articles of Hoo Research do not constitute any investment suggestions. Investment must take into account individual risk tolerances since it involves high risks and. It is strongly recommended to conduct an in-depth investigation of projects and make your own investment decisions carefully.
Feel free to republish the article with credit from Hoo Research (Hoo.com)
Introduction of Hoo Research
Hoo Research is dedicated to researching major issues that are forward-looking and strategic in the development of the blockchain industry, solving the problem of information asymmetry in the industry, and helping to promote the comprehensive development of the blockchain industry. Hoo Research team is a leading research team of industry experts, mainly from famous financial institutions at home and abroad. The research content covers industry trends, application innovation, model exploration, etc. Relying on the unique advantages of Hoo in data, technology and channels, the research results are branded in the niche area.
