What is Terra? A shallow dive into the algorithmic stablecoin protocol

5 May 2022

3 min read

What is Terra? A shallow dive into the algorithmic stablecoin protocol

In this shallow dive series, we are going for an overview of the Terra ecosystem, a stablecoin-centred protocol with one of the best performances in crypto past year. Also, the largest alternative layer-one chain by DeFi activity.

What is Terra?

The Terra ecosystem was created by a startup called Terraform Labs in 2018, founded by Do Kwon and Daniel Shin and is the largest and most active blockchain protocol built on top of Cosmos. Cosmos is a decentralized network of interoperable and independent blockchains. At the time of writing, Terra is sitting on a $28 billion total value locked(TVL) according to DefiLlama with 28 active protocols and counting.

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Terra protocol's main products are the algorithmic stablecoins, the most popular is called TerraUSD, or UST. The stablecoins maintain their pegs through a coin called LUNA, which is a volatile cryptocurrency. The elasticity of its supply keeps the prices of its stablecoins in check.

The project has now the largest activity in DeFi, behind only Ethereum. Its native LUNA and UST tokens have become standouts in the crypto-economy.

LUNA and UST

LUNA is the native utility token of the Terra network. Since Terra is a proof-of-stake(PoS) chain, holders can stake their LUNA helping secure the network and earn rewards. Additionally, LUNA is used to absorb the price volatility of Terra’s algorithmic stablecoins, UST, which is now the third-largest stable coin by market cap, behind only USDT and USDC. LUNA is also a governance token, and grants holders voting power over the protocol.

How it works

To maintain the stablecoin peg to the dollar, Terra mints and burns tokens while also incentivizing arbitrage. In short, this means that for every UST minted, the same amount of LUNA, in value, is burned, and the other way around. This mint-and-burn mechanism causes small fluctuations in both token's prices, which creates arbitrage opportunities.

This same mechanism powers Terra’s other stablecoins, including a stablecoin pegged to the South Korean won and other ones.

Terra’s whitepaper claims that the elasticity of LUNA’s supply means that the stablecoins will never fall out of kilter. Despite that, their success lies in their continued interest and confidence in UST.

At the end of September 2021, Terra launched an upgrade called Columbus-5. This added functionality for the Inter Blockchain Communication(IBC) protocol, which allowed interoperability with other blockchains. Standouts include an insurance protocol called Ozone, and support for UST from cross-blockchain bridge Wormhole V2.

Who's is building on it

There are a lot of new projects coming to Terra, bringing liquidity and use cases to the ecosystem. The most known and responsible for more than 50% of TVL on Terra is Anchor Protocol.

Anchor: Lending and borrowing protocol
Lido: Staking protocol that lets you spend staked assets
Astroport: Automated market maker for Terra tokens
While these are the most prominent projects on Terra by TVL, we could not leave to mention these:
Stader: Protocol for optimizing staking rewards
Mirror: Protocol for issuing synthetic assets
Prism: Protocol for splitting tokens into yield and principal assets
Terraswap: Uniswap-like DEX
Mars Protocol: DeFi credit protocol
Pylon Protocol: Suite of DeFi yield products
Risk Harbor: DeFi risk management marketplace
WhiteWhale: Liquidations protocol

And the list goes on, in case I've left to mention any, please feel free to reach me out.

Terra NFTS

The Terra NFT ecosystem is booming, with a lot of successful projects and collections launched. The standout projects are:

Galactic punks
Luna Bulls
Space Loot
Stylar

And the NFT platforms on Terra:

Knowhere
RandomEarth
Talis Protocol
Luart
OnePlanet
Messier.Art

Where to buy

You can acquire LUNA or UST in all major centralized exchanges and decentralized. Check the image to see a list of the top places in order of volume traded where you can trade LUNA:

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