- Terra is unique among stablecoins due to its algorithmic design
- The Terra ecosystem consists of two tokens: Terra and Luna
- The Terra project is positioning the token for mass adoption in payments
Terra is an algorithmic stablecoin that is aiming to become the first mass-adopted cryptocurrency. Terra was built with the Cosmos SDK and Tendermint, a Byzantine Fault Tolerant Proof-of-Stake (PoS) consensus algorithm. The stablecoin is collateralized by a second native token called Luna (LUNA). In this article, we are going to focus on the relationship between these two tokens, which forms the core of this entire ecosystem.
Understanding the difference between the two tokens
Terra token has been designed to be the currency of choice for the mainstream market. Since adoption is the name of the game, Terra’s plan is to appeal to two specific audience groups – Merchants and End-users.
- Merchants: Due to the complicated payment systems, merchants end up paying 2-3% transaction fees. Terra looks to replace the existing system and bypass the need for multiple intermediaries to facilitate transactions with one single blockchain layer, which will drop the transaction fees to just 0.5%.
- End-user: As Terra keeps growing, the end-users will be able to enjoy a 5-10% discount rate for every transaction. The reason why that will be possible is because of simple supply-demand mechanics. Terra keeps its price steady by increasing and decreasing the money supply. As the Terra economy grows, they will be able to fund discounts with the money supply growth.
So, how exactly can Terra afford to give so many discounts and cashback? To understand that, we need to look into Terra’s integrated seignorage system. Seignorage is the difference between the cost of manufacturing a currency and the real value of the currency itself. So, if it takes $1 to create a $100 note, the seignorage will be $99.
Currently, the most popular stablecoin in the world, Tether, can’t leverage the benefits of seignorage since its algorithm uses $1 fiat to create $1 worth of USDT. With Terra, the situation is different as the cost of production of Terra is much lower than its face value. Terra can use this to provide very rewarding cashback and bonuses, which other payment processors simply can’t offer.
Terra has a proof-of-stake ecosystem, where Luna is the staking coin. Unlike Terra, Luna is not a stablecoin and is subject to the whims of the market. It has two main functionalities:
- Protect Terra from volatility.
- Reward stakeholders.
Protecting Terra from volatility
To stabilize the price of Terra, Luna acts as a counter-party to anyone looking to swap Terra and Luna at Terra’s target exchange rate.
- When Terra’s SDR price < 1 SDR, users and arbitragers can send 1 Terra SDR to the system and receive 1 SDR's worth of Luna.
- When Terra’s SDR price > 1 SDR, users and arbitragers can send 1 SDR’s worth of Luna to the system and receive 1 Terra SDR.
Luna stakeholders are a critical part of Terra’s network. To reward them for their services, they are rewarded with the fees (aka “Terra tax”) taken from all transactions. This is important because what this essentially means is that stakeholders are rewarded with real staking rewards (up to 19% of the total circulation supply). This is different from staking protocols like the one in EOS, where stakeholders are paid off by inflating the existing supply.
Predicting Luna’s Valuation – Crypto J-Curve
In his Medium article, Chris Burniske talks about the “Crypto J-curve.” The J-Curve shows us the relationship between market sentiment and the cryptocurrency’s valuation. As Burniske puts it, a crypto asset’s price consists of two values - “current utility value” (CUV) and “discounted expected utility value (DEUV).” The DEUV can also be thought of as a speculative value of the asset in the near future.
The curve above can be divided into three distinct phases:
- The Release: Soon after the release of the project, there is a lot of hype. Which is why the CUV% is lower than the DEUV%. Around this time, the price of the asset fluctuates wildly because it is dependent on the speculation.
- The Obstacle: Around this time, the developer team encounters some obstacles. This is why the CUV% exceeds DEUV% as hype goes down and doubt creeps up.
- The Final Rise: Very few projects get to fully enjoy this part. It takes a dedicated team, real use case, and adoption for a project to enjoy the final rise. In this case, both CUV and DEUV steadily increase with adoption.
Luna’s use case and partnerships have all put them in the ideal position to make the most out of the third phase. The key to this will be CHAI.
CHAI – The secret behind Terra’s adoption
CHAI is Terra’s mobile payments dApp that allows consumers to pay for items online by simply adding their bank account. CHAI went live on TMON, one of Korea’s largest eCommerce companies with 10 million users and $3.5 billion in GMV, shortly after the launch of Terra’s mainnet. CHAI has been extremely well received by the community. In just three months following its launch, it has managed to garner over 430,000 users and outperformed the more established KakaoPay in both the Apple App Store and the Google Play Store rankings. Recently, Terra reached a million active wallet holders which is a testament to its ever-increasing popularity.
In the later part of 2019, during the Korea Blockchain Week, CHAI announced four blockbuster partnerships which could take Terra’s usage to a whole new level:
- BC Card, Korea’s largest payment processor with >3 million affiliates.
- CU, which has 14,000 retail locations across the country and is easily Korea’s largest convenience store chain.
- Yanojla, Korea’s largest hospitality service with over $2 billion GMV.
- Shinsegae Duty-Free, a leader in Korea’s $17 billion duty-free shopping market.
While the Terra network is poised to take over the South Korean market, it is crucial to understand the differences between the two native tokens.
- Terra is the price-stable coin which users can use for payment purposes.
- Luna is the coin working in the background and held by the stakeholders. Luna’s primary utility is to protect Terra from price fluctuations.
With the popularity of CHAI dApp, more and more users are becoming a part of this promising ecosystem. With these two tokens working in tandem, the growth of the Terra network is pretty much guaranteed.