Over the last year Terra has evolved from being a single use case stablecoin platform out of South Korea to a global ecosystem of financial applications that utilize Terra’s stablecoins. This evolution has led to significant growth in the market cap of Luna, the native token of the Terra network, from around USD50m in early 2020 to over USD2.5bn today. Terra has over 2 million users of its consumer facing CHAI app, it has USD2bn of collateral locked in the Mirror trading application and over USD500m locked in Anchor, a lending and borrowing product. This month we will look into this emerging Terra ecosystem and the products being built on the Terra blockchain.
Terra was founded in 2018 with a specific use case in mind. Daniel Shin, the co-founder of Terra, had previously built an ecommerce company in South Korea and sold it to KKR. This process had shown him how expensive and inefficient payment processing services are. Ecommerce companies operate on razor thin margins and yet are paying up to 3% of transaction amounts to payment processing companies. Shin realized that using blockchain technology and specifically stablecoins, these fees could be drastically reduced. Terra was born with this use case in mind.
At the core of the Terra ecosystem is a suite of algorithmic stablecoins. These stablecoins hold their peg owing to the dual token architecture of the system. On one side of the market is the Luna token. This token absorbs any volatility that the stablecoins may encounter. For example, should the price of KRT (the Terra stablecoin for the South Korean won, KRW) be priced above one KRW, then arbitrageurs will mint more KRT by burning Luna. The protocol will always allow minting to happen at the pegged price, meaning that arbitrageurs will continue to mint and sell KRT at a profit until the spread has vanished. Should the price of KRT fall below the peg then the process can be reversed, with traders able to burn 1 KRT in return for 1 KRW worth of Luna. This removes KRT from circulation until the peg is re-established.
The first real world use case of Terra was the Chai app. This is a payment processing app that is similar to PayPal or AliPay. On the merchant side, the target client for Chai has been ecommerce companies looking for cheap transaction processing providers. Chai has fees of just 0.5%, which significantly undercuts its competitors from legacy financial services, and offers instant settlement. As of early June 2021, Chai has over 2.4m users and processes over 130,000 transactions per day.
The second use case for the Terra ecosystem is a synthetic trading app called Mirror. Users of Mirror can create tokenized versions of stocks by depositing collateral, such as the Terra stablecoins, into the Mirror contracts. The newly created tokens are called Mirrored Assets (mAssets) and they mimic the price of real-world assets. When mAssets are minted, they must be over-collateralised by the creator and should the price of the real world-asset increase above a threshold, then the mAsset will be liquidated with the collateral passing through to arbitrageurs. Mirror combines traditional finance with crypto. It is already proving popular with around USD2bn locked in the Mirror smart contracts and over 20 mAssets being traded, such as mTSLA, mAAPL and mGOOGL.
The third and most recent use case of the Terra network is a savings product called Anchor. Anchor offers an interest rate of around 20% for users that deposit UST (the Terra USD stablecoin) into its savings product. The way that the protocol manages to achieve this interest rate is by lending out UST to borrowers who overcollateralize their loans with Luna. The borrower does not need to pay a fee for borrowing, but the deposited collateral will earn interest that flows to the lender. Specifically, deposited Luna is staked in the Terra network to earn interest and this interest payment is routed back to the original lender of UST. Given the 2x overcollateralization of the loan, an 11% return on staking Luna translates into a 22% return on lent UST.
Aside from being a useful standalone platform, Anchor is now being used as a base layer system for other products. It has an open-source Savings-as-a-Service SDK that can be integrated in other applications using just 10 lines of code. This allows exchanges, B2B businesses and fintech platforms to integrate Anchor and offer interest-bearing savings accounts. For example, Yotta is a growing savings platform for US investors that has integrated Anchor to boost the interest rates it can offer users. This integration is hidden in the background, so that users do not need to understand how Anchor, Terra or blockchains works. Another example is Pylon, which allows users to deposit money and invest the yields, provided by Anchor. Users have the security of not risking their base collateral, while benefiting from potential investment gains.
Today, the Terra ecosystem is still small relative to platforms like Ethereum. The community is also centralized around leading figures like Do Kwon, the co-founder of Terra, and around Terraform Labs, the main software development entity building on top of Terra. Looking ahead, it is clear that Terra is trying to expand beyond this clique and is promoting innovation in its ecosystem. A hackathon was held in May with the specific purpose of encouraging engineers to join the ecosystem, build new products using Terra’s stablecoins and build on top of existing protocols like Anchor and Mirror.
CMCC Global was a seed investor in Terra back in 2018 and we continue to support the ecosystem. We hold LUNA in our funds and we have been investing into the ecosystem through platforms like Anchor. We are excited by the expanded vision for Terra and like the fact that many users of Terra’s blockchain have no idea that they are using a blockchain solution. Like many good technologies, it is hidden from view and simply provides a better solution.
For a deeper dive into Terra, you can watch the interview that we held with Do Kwon, the co-founder of Terra, in November 2020: