Table of Contents
Cryptocurrencies have always felt like an exclusive investment club for the cool geeks; an underground-like movement always on the cusp of dethroning mainstream financial systems. However, decentralised networks have yet to achieve mainstream adoption due to their obvious lack of “real-life” applications. Blockchains such as Bitcoin are severely limited by sluggish transaction speeds, while their newer alternatives offer little to no differentiation from one another. They also largely fail to address the elephant in the room: how can blockchain technology and cryptocurrencies be used in everyday transactions and activities?
No, the buying and selling of cartoon monkeys do not constitute “everyday activities”. Neither is decentralised finance (DeFi) going to execute that near-instant transaction when you order an overpriced coffee. The reality is that most cryptocurrencies like bitcoin and ether are far too volatile to be used as everyday money, which highlights the importance of cryptocurrencies that are less prone to wild price swings: stablecoins.
In a December article by CNBC, Matt Hougan, chief investment officer at Bitwise Asset Management, dubbed Terra (LUNA) as the coin “hot among the cool kids right now”. While the reasons behind its apparent popularity with the know-it-all hipsters are unknown, the Terra blockchain does offer an interesting proposition for investors because it can actually be used as a mainstream payments system.
To understand why you’re going to be the coolest kid for investing in LUNA, it’s imperative to first have a grasp of the Terra blockchain, and how it aims to create an interoperable network for stablecoins – an increasingly significant element of the DeFi space and a potential medium of exchange for daily transactions with the added benefits of blockchain technology.
International stablecoins for an interoperable payments system
Stablecoins on Terra’s blockchain like TerraUSD (UST) maintain their peg through on-chain incentives – US$1 worth of LUNA can be swapped for US$1 worth of UST and vice versa. This also means that US$1 worth of LUNA is burned for every US$1 worth of UST minted and vice versa. If UST deviates from its peg, the Terra blockchain uses LUNA to stabilise the price of UST by agreeing to counter-party anyone looking to swap UST and LUNA at UST’s target exchange rate of US$1. The arbitrage acts as an incentive for users to maintain UST’s peg to US$1. Because LUNA is burned when UST is minted, the supply of LUNA will supposedly decrease over time if demand for Terra’s stablecoins increase, therefore potentially making LUNA a deflationary asset.
The development of decentralised stablecoins is nothing new in the blockchain industry. However, what sets Terra’s stablecoins apart from its competitors is that it’s maintained by a volatile cryptocurrency (LUNA) that ensures the monetary policy of an entire network of stablecoins. Unlike other stablecoin providers like Tether or MakerDAO, Terra has a wider range of stablecoin denominations including TerraCNY, TerraJPY, TerraGBP, TerraKRW, TerraEUR, and the International Monetary Fund’s TerraSDR. This means that the Terra blockchain can be utilised as a cross-border payments system as well as a standalone payments system for merchants in specific countries.
Terra is also aiming to become fully interoperable with other blockchains – the key to blockchain technology’s adoption in Web 3.0. The Terra blockchain is built on Cosmos, “the internet for blockchains” that enables independent blockchains to exchange information and assets between one another via the Cosmos Inter-Blockchain Communication (IBC) protocol.
Since June 2021, Terra’s stablecoins are available for cross-chain asset transfers between Terra’s ecosystem, Ethereum and Solana. Assets on Terra’s two major DeFi platforms – Anchor Protocol and Mirror Protocol – can also be sent via Terra bridges between Terra, Ethereum and Binance Smart Chain (BSC), therefore potentially positioning the Terra blockchain as a major decentralised stablecoin provider within the DeFi space.
A blockchain for e-commerce
Terra has already built an ecommerce alliance in Asia with 15 initial partners that account for a combined USD 25 billion in Gross Merchandise Value (GMV) and a 45 million-strong customer base.
An example of Terra’s application as an e-commerce payments network is the Chai payments platform developed by Terra co-founder Daniel Shin. Chai allows merchants in South Korea to settle transactions with fees of 0.5%, significantly lower than credit card companies that charge up to 3%. Users purchase TerraKRW (KRT) by depositing KRT into their Chai accounts. Chai manages a Terra crypto wallet on behalf of their customers, and when an item is purchased, the transaction is automatically verified on the Terra blockchain, and the merchant is paid in KRT.
According to Terra, the Chai user experience is not designed to feel like a crypto transaction. Rather, it’s more similar to PayPal or other consumer fiat wallets, therefore offering a glimpse of how cryptocurrencies can be utilised by laymen without them knowing that they’re actually using blockchain technology to settle transactions. More importantly, it also paves the way for stablecoin adoption in everyday transactions outside of the DeFi and cross-border payments industry.
Risks
I’m a self-proclaimed blockchain purist, which means I like my blockchains completely decentralised, extremely scalable, and with a high degree of security (admittedly a near impossible feat at this point in time). The Terra blockchain is extremely scalable, clocking in at a maximum of 10,000 TPS (transactions per second) and a block time of 6 seconds, which means that it’s almost five times faster than Visa (2,000 TPS). However, as highlighted in our explainer on the blockchain trilemma, decentralisation is unfortunately a trade off for scalability. The majority of LUNA are believed to be held internally by the Terraform Labs team, which means that LUNA is theoretically susceptible to price-crashing dumps.
There is also a significant risk of Terra stablecoins losing their peg during periods of sharp market contractions. During a correction in May 2020, investors were swapping Terra stablecoins back to LUNA, just as the price of LUNA was tumbling due to investors selling off LUNA. This resulted in Terra stablecoins losing nearly 7% of their value within a few days, as the LUNA to stablecoin arbitrage became unprofitable.
For the cool and savvy investor
Terra is a project with immense potential because of how its blockchain can be used in everyday transactions. It’s also interoperable with a growing number of prominent blockchains, which means that Terra can become the de facto provider of stablecoins in the NFT and DeFi space. However, regulators are already starting to crack down on stablecoins, and it remains to be seen if governments around the world will actually allow Terra to become a mainstream payments system.
Terra (LUNA) has performed incredibly well since its inception in 2019, rising by 8,876.76% YTD and peaking at US$102.90 in December 2021. While the outlook of the cryptocurrency market will remain murky in 2022 due to the tightening of monetary policies, Terra (LUNA)’s current price of US$71 is a definite bargain that investors should pay attention to. Cool kid or not.
