Haoyue Rising: Interpretation of the Holy Triangle of Terra Ecology

Haoyue Rising: Interpretation of the Holy Triangle of Terra Ecology

Blockchains and stablecoins have a common key weakness: without adoption, they are useless.

The approach taken by most ecosystems is to “build it and wait for the project to adopt it.” In other words, if the technology stack is good enough, the project will automatically want to use them, or at least migrate from their main chain (for example, Sushiswap is launched on BSC, FTM, xDai, etc.). Other chains, such as Polygon, have taken a different approach by providing highly diluted tokens (MATIC) to attract high-yield stimulus pursuers, thereby guiding liquidity and the use of chains.

In all cases, native stablecoins are the glue that supports the system. More and more cryptocurrency users hope to get the security of stable assets when they enter a new chain, rather than being exposed to the potential fluctuations of the ecosystem’s native tokens. For example, no one wants to be required to hold AVAX, FTM, MATIC, etc. in order to try a new chain. This is why USDC, USDT and DAI are often the first tokens to be listed on the new chain. As entities that are centralized (USDC, USDT) and most centralized (DAI, exposed to USDC), the regulatory risks they face cannot be underestimated; however, they are the most liquid and trustworthy stablecoins, so It is also the first token to provide stability to the new chain.

*Note: “Trust” here refers to the ability of stablecoins to maintain their peg and to be redeemed for their basic pegged value. Frankly speaking, these stablecoins are excellent in this regard, partly because of their centralization. Whether we should believe these external entities is a completely different topic.

1. Enter Terra

While paying great attention to the quality of its blockchain, Terra has adopted a unique approach to guide its ecosystem by doing three things:

1. They created their own stable currency, using a dual-token flexible supply mechanism: UST and Luna.

2. They launched two native projects, Mirror (synthetic stock) and Anchor (to generate revenue for UST), to create a direct use case and demand for their stablecoin.

3. By cooperating with Chai and Memepay, online and offline merchants in South Korea (used by 5% of the population) and Mongolia (used by 3% of the population) established an in-depth real-world use network and created an in-depth real-world usage network. Off-chain demand.

2. Terra’s Holy Triangle

Haoyue Rising: Interpretation of the Holy Triangle of Terra Ecology

Each part plays a key role in expanding the scope of use of UST, strengthening the feedback loop, and creating a deeper level of liquidity and value within the ecosystem. We call these feedback loops “flywheel”, which is just another word for the cyclical incentive structure, which connects every part of the system and supports each other in an endless loop. (Axie Infinity flywheel).

The rest of this article will introduce each part as follows:

1. What is Terra Blockchain?

2. Protocol flywheel: How do Luna and TerraStables work?

3. The flywheel on the chain: what is an Anchor? What is Mirror?

4. Out-of-chain flywheel: What are Chai and Memepay?

5. Other supplementary agreements

6. What is the future of Terra? What is Columbus-5 and how does it change the rules of the game?

7. Conclusions and opinions

3. What is the Terra blockchain?

Haoyue Rising: Interpretation of the Holy Triangle of Terra Ecology

Roadmap of Terra Ecosystem

Founded

Terra is a blockchain project that was launched in January 2018, and the mainnet was launched in April 2019. Terra is the first project developed by the Korean company Terraform Labs, which was co-founded by Do Kwon and Daniel Shin.

Terra completed a $32 million seed round in 2018, led by leading funds such as Polychain Capital, FBG Capital, Hashed, 1kx, Kenetic Capital, and Arrington XRP Capital. The most unusual thing is that it was among the six leading exchanges at the time. Four companies also participated in the investment, namely Binance Labs, OKEx, Huobi Capital and Upbit’s investment department. In early 2021, Terra raised another $25 million in funding, backed by Galaxy Digital, Pantera Capital, Coinbase Ventures, and returning investors Arrington XRP, Hashed, and Kenetic Capital. Recently, on July 16, 2021, Terraform Labs completed a $150 million financing, with investors including Arrington XRP Capital, Pantera Capital, Galaxy Digital, and BlockTower Capital. This $150 million is designated for Terra’s “Ecosystem Fund”, which will be used to sponsor projects built on the Terra blockchain.

intention

The development of the Terra blockchain is guided by a single, driven goal: what can cryptocurrency do for people in the real world?

The encryption field often only focuses on its own development on the chain. In contrast, a large part of Terra’s success comes from off-chain applications such as Chai (used by 5% of the population in South Korea) and Memepay (used by 2% of the population in Mongolia) and other merchant-centric applications. A key decision they made was to hide the inner workings of the blockchain and create a user-friendly positive application. Unlike the way payment apps usually focus heavily on customers, Terra (via the Chai app) has expanded extremely quickly to the Korean market by focusing exclusively on merchant incentives, which we will discuss in depth in later chapters.

Haoyue Rising: Interpretation of the Holy Triangle of Terra Ecology

Humanized application design of Chai app

Technical specifications

“Terra is an application-specific proof-of-stake blockchain that uses the Tendermint consensus built on the Cosmos SDK.”-Terraform Lab

Why is Tendermint? Bitcoin’s consensus mechanism requires very intensive hardware and power consumption to quickly process transactions through PoW (Proof of Work). Over time, scalability and speed issues have been formed.

Tendermint aims to correct this problem and establish consensus through a large number of distributed nodes, instead of resorting to PoW, but using PoS (Proof-of-Stake). Their main goal is to focus on speed, security, and blockchain scalability, with an emphasis on cross-chain technology.

The following is a brief overview of the features provided by Terra Core built on Tendermint:

1. Developers can write smart contracts in the programming language and development environment of their choice.

2. Tendermint BFT (Byzantine Fault Tolerance) Even if the machine ⅓ fails arbitrarily or maliciously, an application can still be secured and replicated on many machines. Note, however, that this is a relatively low tolerance compared to Bitcoin, which will fail at the 50% threshold.

3. If the verifier of ⅓ is malicious, then the Terra blockchain will only temporarily pause until a consensus is reached, rather than forking the network.

4. Blocks and transactions are shared between nodes.

5. It can run on multiple chains because it is connected by Cosmos IBC (inter-blockchain communication)

Remember that some risks of DPoS (Delegated Proof of Stake) inherently make Terra Core vulnerable to some key risk factors: node centralization

The DPoS consensus mechanism usually relies on a small number of representatives to ensure the security of the network and puts the interests of the network first. If there are too few principals entrusted to ensure the security of the entire network, a centralization problem will arise, because the control of 51% of the principals is sufficient to control the entire network.

Haoyue Rising: Interpretation of the Holy Triangle of Terra Ecology

The first few verified Zheer’s voting rights and control rights

For Terra, there are currently only 130 validators. Over time, this number is expected to increase to 300.

In this snapshot, the top 10 validators hold 42% of the voting rights.

From the above classification, you may notice that the top 4 validators also have a larger proportion of voting power than other members in the top 10. We can see this more intuitively in the figure below.

Haoyue Rising: Interpretation of the Holy Triangle of Terra Ecology

The validators are currently ranked by voting rights, the data comes from flipsidecrypto.com, using the SQL code of 0XFRANK’s Terra dashboard

What measures are being taken to solve this problem?

1. Do Kwon stated that future airdrops will be issued to verifiers with fewer delegators (Note: Users who want to pledge Luna but do not have or cannot run their own verifier will pledge Luna to the verifier, which is called the delegator, or Delegator).

2. The launch of the Terra delegation plan is to encourage delegators to spread to smaller verifiers. Some requirements include having less than 1.5 million authorizations, running a testnet validator, maintaining a threshold uptime (≥99%), oracle voting (≤20% errors), governance participation (in the past 10 votes) ≥90%), and at least 3 months of running time. The total amount ($50 million LUNA) designated by the Terra Foundation for the program was re-commissioned and evenly distributed to the remaining 43 qualified participants.

When we compare Terra with other blockchains, we can see that it has relatively fewer validator accounts compared to other staking chains.

Haoyue Rising: Interpretation of the Holy Triangle of Terra Ecology

The number of validators per chain, data source @shegenerates

Note: Cardano has more than 1200 validators, and they have never generated a block.

Note 2: Ethereum is an extremely decentralized network, but a validator is measured by 32 ETH deposits, not a single individual. In fact, according to current data from nansen.ai, as of August 1, 2021, Ethereum has a total of 202,000 validators and 40,500 unique depositors. From the classification of depositors in the figure below, we can see that 8 entities control almost half of the staking power.

Haoyue Rising: Interpretation of the Holy Triangle of Terra Ecology

On August 1, 2021, the depositor classification of Eth2 pledge. Data from nansen.ai

As Terra continues to develop and expand, it remains to be seen whether they will reduce their reliance on large validators, but they are working to correct this problem, entrusting Luna’s pledgers to small validators for airdrops, and successfully launching Terra The validator plan re-delegates Luna to small validators who meet stringent requirements such as uptime and voting.

4. Protocol flywheel: How do Luna and TerraStables work?

The operation of the Terra ecosystem adopts a dual-token design:

1. Luna, the token for governance, pledge and verification

2. UST, its native US dollar pegged stable currency*.

Note: There are other TerraStables, such as TerraKRW, TerraMNT, TerraSDR, but UST is by far the largest, so we will only discuss UST in depth.

Why are there two tokens instead of just Luna and some other custodial stablecoins? Because Terra firmly believes in the decentralization of cryptocurrencies and the spirit of resistance to censorship, and more specifically, believes that stablecoins are the backbone of the DeFi stack.

By design, custodial stablecoins cannot serve these goals. Although Circle’s USDC and Bitfinex’s Tether are stable, they will always be subject to how the government chooses to regulate stablecoins in the future. As recently as July 19, Yellen asked regulators to draw up a framework around stablecoins as soon as possible. Custodial stablecoins are also vulnerable to censorship. Circle can freeze USDC at the request of law enforcement agencies, and this may bring serious tail risks to individuals, companies, funds, and ecosystems that rely heavily on USDC.

UST is an algorithm-linked stablecoin. But before we dive into the mechanism of UST, we need to first understand Luna, which plays a key role in both the Terra ecosystem and the maintenance of the UST itself.

Month

Haoyue Rising: Interpretation of the Holy Triangle of Terra Ecology

Luna is the governance, pledge and verification token of the Terra ecosystem. As a proof-of-stake blockchain, Terra Core requires verifiers to pledge Luna to ensure system security. Another benefit provided by validators is to absorb volatility, which we will discuss in the UST section. As an agreement to do this service and as a reward for volatility risk, they receive a pledge APR% reward from the cost of gas, tax and seigniorage.

Gas fees are applied to every transaction to prevent spam transactions.

The stability tax applies to every coin and burning transaction. There is a “Tobin tax” for spot-converted Terra-Terra swaps, which is set at 0.35%. There is also a minimum spread tax, the tax rate for Terra-Luna swaps is 0.5%.

Seigniorage is the value of money minus the cost of producing money, for example, 1 dollar banknote minus printing costs, or 1 USD Terra coin minus minting cost (zero). Currently, seigniorage profits are allocated to the community fund pool every week to fund activities in the Terra ecosystem, and the rest is used to reward the fund pool of Lunastakers. The rewards to the mint will be issued within one year to encourage long-term dedication.

Seigniorage is very important, it happened when Luna was burned down. This happens when the demand for UST increases, such as when people buy stablecoins on Terra. Part of the burned Luna went to the national treasury to fund further operations, and the rest went to the mint. This also makes the mining/validator power more valuable and scarce, because the more Luna is burned, the higher the cost of becoming a validator.

Incentives appear in the form of validators, which we have discussed before, as well as delegators. The delegator can be anyone who holds Luna and wants to participate in ensuring the safety of Terra. To do this, they have to choose one of 130 validators and delegate their Luna to them. In return, they will receive a portion of pledge rewards from Gas, taxes, and seigniorage, as well as weekly airdrops from certain agreements (such as Mirror) (and more agreements). The individual who delegates and verifies must be bound to Luna, and can no longer conduct transactions before unbinding. When it is unbound, it will no longer accumulate rewards and cannot be traded immediately. On the contrary, it will be locked for 21 days. This ensures that a large amount of supply unlocks cannot be dumped into the circulation field immediately, and destabilizes the system, and it also encourages long-term thinking by the delegators and verifiers who are securing the Terra network. This is a win-win situation.

SET

When it comes to Luna, one cannot fail to mention its native stable currency, of which Terra Dollar or UST is the largest stable currency.

As mentioned earlier, stablecoins are indispensable for on-chain applications. When users enter a new system, they usually prefer stable assets to eliminate the risk to the usually unstable native assets, such as SOL (Solana), MATIC (Polygon), FTM (Fantom), Luna (Terra), and even ETH (Ethereum).

First, let us briefly understand the types of stablecoins and the differences between UST.

There are three main types of stablecoins:

1. Managed type-USDC, Tether, GUSD, BUSD, TUSD

2. Over-collateralized debt-Dai, sUSD, LUSD, alUSD

3. Algorithm type-Ampleforth (AMPL), Fei, Frax, TerraUSD (UST)

Custodial stablecoins are supported by a centralized entity 1:1. For every USDC, Circle holds the equivalent of U.S. dollars, and so on, for every other currency on the list. The token itself is essentially a tokenized IOU, which can be redeemed at the origin. This makes it easy to hold the hook. For example, if the price of USDC drops by 5% to 0.95, you can immediately guarantee that 1 USDC worth 0.95 will be converted to its full value of 1 U.S. dollar, because it is in Circle’s reserves. This creates a high level of trust in the peg and allows effective and strict arbitrage to occur around 1 USD. Of course, the risk lies in the review and trust in Circle, supporting the peg with the actual holding of the equivalent dollar.

Haoyue Rising: Interpretation of the Holy Triangle of Terra Ecology

Arbitrage around USDC

Over-collateralized debt stablecoins are similar to custodial currencies. They are backed by one currency, but in the case of cryptocurrencies, they are usually over-collateralized by highly volatile assets such as Ethereum and Synthetix. For example, Dai is supported by Ethereum (and recently USDC to create more stability), but in order to protect the stability of the peg, users who wish to mint Dai must pledge 1.5 times the amount of Dai they wish to receive Eth and lock it in the CDP (collateralized debt position). It’s like their Eth loan, so they don’t have to sell it, in turn, they will receive a certain percentage of Dai, which is now backed by their Eth. In other words, you must provide $150 worth of Eth for every $100 you receive. This is called the mortgage rate, and the MakerDao protocol sets it at 150%. However, since CDP is a loan, if the underlying Eth value drops too fast, it can and will liquidate all your Eth to repay it.

Algorithmic stablecoins have various mechanisms to retain their pegs, from bond purchases to partial mortgages to procedural contraction and expansion, and even a combination of all of them. The risk of these coins often involves the lack of motivation to maintain the peg, because once the algorithmic stablecoin deviates from $1 and does not immediately rebound, the trust in the agreement’s ability to regain the peg will be broken, and this disillusionment brings about a sell-off. Stress tends to form a death spiral until it reaches zero.

So, what makes Luna so dependent on UST, and vice versa? Let us introduce the coinage and combustion mechanism involved between UST and Luna.

UST is an algorithm-linked stablecoin that uses minting and burning mechanisms, using Luna and UST as leverage. This allows the agreement to expand and contract supply to maintain the UST peg. The link is completely maintained by arbitrageurs.

Let us consider the following two scenarios:

1. The price of UST deviated from the peg by 5%, reaching US$0.95. This requires the agreement to shrink the supply of UST in order to maintain the $1 peg. In order to make this opportunity valuable to arbitrageurs, the agreement will allow you to use the UST you buy to mint Luna worth $1, even if the price of the UST is $0.95. This allows arbitrageurs to immediately obtain a return of $0.05 for every dollar of UST purchased. This increased the supply of Luna because the arbitrageurs minted additional Luna from the agreement and contracted the supply of UST because they converted it to mint Luna and eventually restored the peg. Think of this mechanism as a free 5% discount for Luna when the UST is less than $1.

2. The price of UST deviated from the pegged 5%, reaching $1.05. This requires an agreement to expand the supply of UST to maintain the $1 peg. In order to make this opportunity valuable to arbitrageurs, the agreement will allow you to mint $1 worth of UST and have Luna hand over and burn it, even if the price of UST is $1.05. This allows arbitrageurs to immediately pocket the difference of $0.05 when they turn around and sell the newly minted UST to the market. This increases the supply of UST because arbitrageurs continue to cast discounted UST from the agreement and will shrink Luna’s supply because they turned it into UST. This continued pressure will eventually restore the peg. Think of this mechanism as a 5% free discount for UST when UST exceeds $1.

Haoyue Rising: Interpretation of the Holy Triangle of Terra Ecology

Arbitrage around Luna and UST

If you remember our example in custodial stablecoins, then this is actually very similar to how to get your USDC back from Circle, except that you don’t get back a supported stable by submitting a tokenized version that loses its peg Assets, but to cast an unstable asset Luna, UST to an unsupported asset, and use it as an arbitrage to recover the difference. Through arbitrage this difference, you help UST maintain its peg by burning the assets you handed in, and get rewarded through free discounts on the assets you receive.

Okay, go back! You might think that arbitrage USDC makes sense because it is guaranteed and supported by Circle, and the U.S. dollars you exchange for USDC are actually stable. One dollar is always worth one dollar (but there is inflation! Don’t mind…). The relationship between Luna and UST is definitely not like this.

So, what can force anyone to use the highly volatile Luna to arbitrage unsecured UST, especially to the level where UST needs to maintain its peg? It will inevitably be forgotten, because Luna will be sold, people will no longer have the incentive to buy out-of-stock UST? UST does not have any support, so it should be zeroed and Luna will be taken away.

But the fact is that UST is supportive to some extent. Not relying on the U.S. dollar or cryptocurrency, but relying on the growth of the Terra ecosystem itself. How can one profit from the growth of an ecosystem? The answer is to adopt! Earlier, we said that the most important thing for a stablecoin and blockchain is to be used. So let’s review what happens when UST is used and adopted.

We just mentioned that when the price of UST exceeds the peg, or is greater than $1, UST needs to be minted and restored to the peg. To do this, you must surrender your Luna, and Luna will be burned. This reduces Luna’s supply and puts upward pressure on its price, making mining and staking more scarce. But what does this have to do with growth? Well, with the adoption and agreement of UST burning Luna, it continues to make Luna more valuable over time. Because Luna is used as an arbitrage tool to maintain the peg of UST, it needs to have value outside of it, otherwise, it will be sold to zero, and no one will voluntarily maintain the peg of UST.

Burning Luna helps to give it more value, but remember that Luna’s main source of income is the use of the network itself. Pledge delegators and verifiers are paid in the form of fees, taxes, and seigniorage, so this helps drive value back to Luna and makes it essentially a call option for the growth of the Terra ecosystem, thereby promoting the adoption of UST.

UST is “supported” by the adoption of UST and the use of the Internet

Although adoption is very important, people may ask whether UST is really a “stable” token, or is it just a token trying to stabilize.

In fact, it is very stable to a large extent, but it doesn’t matter if it loses one day’s hook. By definition, a stable token must retain its peg, especially an algorithm currency, which can exhibit extremely reflexive behavior. Once the trust in the agreement is broken, the death vortex may occur in just a few hours.

So, what happened to UST in the days between 5/19 and 5/23? If you are familiar with UST, you will know that UST has indeed lost its hook for two consecutive days, as shown in the figure below.

Haoyue Rising: Interpretation of the Holy Triangle of Terra Ecology

Although this is only a two-day actual decoupling, and overall, only 2.1% of UST’s trading days are less than $0.95, but this is worrisome. This also happened when the value of other parts of the market was “halved”, and the entire market fell by 50%-80%. However, when a stablecoin that is considered a safe haven in the face of the black swan incident fails to become what it calls, none of these can be reassuring.

How does UST lose the hook?

UST did lose the link, but not because the underlying mechanism broke under pressure, as most people assumed, but because the oracle feed ceased to provide Luna price data. One of the responsibilities of the verifier is to serve as an oracle machine and provide accurate price data through on-chain transactions on public nodes.

What happened was that Terra’s lending platform Anchor Protocol was experiencing tremendous pressure due to the volatility of the entire cryptocurrency. Users submitted 2.58 million requests within 30 minutes, and Anchor’s nodes became overloaded. The sell-off of Luna triggered more than 4,000 clearings. As a result, the network became overwhelmed and transactions were no longer accepted by nodes, which are the nodes used by validators to provide Luna price data.

The interruption of the oracle data caused the Terra agreement to automatically freeze the Luna <> UST swap market, so arbitrageurs were unable to complete their basic tasks to restore UST to $1.

UST did lose the link, but not because the underlying mechanism broke under pressure, as most people assumed, but because the oracle feed ceased to provide Luna price data. One of the responsibilities of the verifier is to serve as an oracle machine and provide accurate price data through on-chain transactions on public nodes.

What happened was that Terra’s lending platform Anchor Protocol was experiencing tremendous pressure due to the volatility of the entire cryptocurrency. Users submitted 2.58 million requests within 30 minutes, and Anchor’s nodes became overloaded. The sell-off of Luna triggered more than 4,000 clearings. As a result, the network became overwhelmed and transactions were no longer accepted by nodes, which are the nodes used by validators to provide Luna price data.

The interruption of the oracle data caused the Terra agreement to automatically freeze the Luna <> UST swap market, so arbitrageurs were unable to complete their basic tasks to restore UST to $1.

Sentiment + number of tweets

The following is a brief overview of Luna and UST’s sentiment and number of tweets about their competitors:

Haoyue Rising: Interpretation of the Holy Triangle of Terra Ecology

Luna’s number of tweets recently surpassed its competing ecosystem, with only more than 2,000 tweets per day.

Haoyue Rising: Interpretation of the Holy Triangle of Terra Ecology

Since April 1, Luna’s 30-day average daily sentiment has climbed to above 50, and for the first time is in a leading position among competitors.

Haoyue Rising: Interpretation of the Holy Triangle of Terra Ecology

In the last month after the Ministry of Finance held talks on stablecoin regulation, UST’s tweets ranked second among the top five stablecoins.

5. The flywheel on the chain: Anchor and Mirror

We have determined that in order for Terra to grow, it needs to adopt UST more, which in turn strengthens its linkage by making Luna more valuable. Luna has also become more valuable due to more Internet usage. This is the full role of the protocol flywheel. UST powers Luna, and Luna powers UST, and so on.

However, the adoption of stablecoins is one of the most difficult areas to succeed. A good protocol design is not enough to make a stablecoin pegged. Stablecoins require a huge network effect to succeed, which means adoption in as many applications and blockchains as possible. This requires strong partnerships and integration with applications to promote usage.

Terra has adopted a unique method to guide UST’s demand and network growth. Terraform Labs did not wait for the project to be built on Terra and promote adoption organically, but chose to guide the ecosystem by launching two native applications, Anchor and Mirror.

Anchor and Mirror are on-chain flywheels funded and launched by Terraform Labs to guide the needs of UST.

Haoyue Rising: Interpretation of the Holy Triangle of Terra Ecology

Anchor agreement

Anchor is a fixed APY savings product, arguably the most important agreement in the Terra ecosystem. It provides a fixed annual interest rate of 20% for cash deposits, which is the highest interest rate for surrounding stablecoins. The average interest rate for dollars held in bank accounts in the United States is only 0.03%. The provision of this fixed interest rate is the biggest driving force for UST adoption because it is used as an advertising tool and the key to its off-chain products.

People usually scoff at its 20% annual interest rate, thinking that it functions like a Ponzi scheme in which new depositors pay old depositors. But where do these yields come from?

Anchor is like a bank. When you deposit money in the bank, you are actually lending your money to someone else. The bank seizes the borrowing interest rate and pays you the meager loan interest rate. A traditional bank is essentially a lending platform, which pockets the proceeds instead of returning them to you.

Anchor’s rate of return comes from the assets that generate revenue. As of this writing, Luna and Eth are two collaterals that accept deposits. With these assets, you can borrow up to 50% of the collateral to mint UST, and then you can use it in any way you choose. You can sell it in exchange for another asset, connect it to another chain for farming, or even deposit it back to Anchor for a 20% return. For example, you can deposit $1,000 worth of Luna, mint $500 of UST, use Wormhole to bridge it to Solana, and deposit the UST on the Mercurial platform to farm at a yield of 27.74%.

*Note: Interest rates are data as of the time of writing and are variable.

What Anchor does is to use your rate of return to generate deposits, instead of pocketing the rate of return or returning the rate of return to you, it actually pays the rate of return to the depositor of UST. This is how UST depositors get a 20% fixed interest rate APY.

Anchor uses additional incentives to generate a steady stream of Luna and Eth depositors who enter the agreement.

The borrower will be paid

Haoyue Rising: Interpretation of the Holy Triangle of Terra Ecology

As of August 3, 21, the current annual interest rate paid to UST borrowers

Anchor has a governance token, ANC, which is used for liquid mining plans and pays APR% to borrowers over a period of time. These interest rates continue to fluctuate based on borrowing needs and have reached as high as 400% in the early stages of the agreement. The ANC token itself can be used for unilateral fixed investment and ANC-UST LP pool to generate additional revenue.

The following is the situation of the flywheel, as shown in the figure below:

Haoyue Rising: Interpretation of the Holy Triangle of Terra Ecology

risk

A key risk in the Anchor agreement is when the deposited collateral cannot generate enough annual interest rates to pay UST lenders. For example, if the mortgage rate of Luna is only 8%, and you multiply it by 2, because the mortgage rate of Anchor is 200%, this can only create a rate of return of 16%. This is 4% less than the 20% promised to UST lenders.

In order to make up for the difference, Anchor Protocol has a fund bank to cover the difference. In good times, any additional Luna rate of return of more than 20% is used to enrich the fund pool. However, when the Luna yield market is sluggish (usually during periods of intense cryptocurrency crashes and bear markets), the funding pool is constantly being emptied to pay UST depositors. As cryptocurrency traders and investors flee to stablecoins such as UST and seek security gains, more and more users will deposit into UST, which makes the consumption of funds faster. The rewards of ANC borrowers rose to compensate (>200% in the May crash), but this often did not attract enough funds to correct the imbalance.

After 5/20, users are increasingly worried that the yield reserve will be exhausted, so TerraForm Labs injected $70 million from its stable reserve fund to continue to pay a fixed annual interest rate. Additional leverage, such as increasing LTV to 65%, diversification of yield sources, and additional deposit assets, such as SOL, ATOM, and DOT, are all measures being taken to alleviate the loss of yield reserves. According to the proposal, the injection of this capital is expected to support deposits worth US$500 million to obtain an annual interest rate of 20% within 1.5 years.

As the owner of more than 22% of UST supplies, Anchor is expected to receive strong support from TerraForm Laboratories until they become a self-sufficient system. This is essential for long-term development, because it is not just on-chain protocols that rely on Anchor’s revenue, but also off-chain projects such as Chai and Memepay.

Haoyue Rising: Interpretation of the Holy Triangle of Terra Ecology

As of August 3, 21, the share of TVL in the main Terra agreement

Anchor is the glue that holds everything together, so it may be very strong and will not collapse.

Mirror Finance

Mirror Finance is the other largest TVL owner in the Terra ecosystem. Mirror, launched in December 202, is an agreement that creates a synthetic asset called mAssets (mirror asset) to “mirror” its off-chain corresponding price. For example, mTSLA will track the price of Tesla. The assets currently listed on Mirror are mQQQ, mAAPL, mBABA, mTSLA, mNFLX, mUSO, mAMZN, mVIXY, mGOOGL, mTWTR, mMSFT, mSLV and mIAU. Users can cast mAssets, exchange them, provide liquidity, and enter “long” and “short” farms.

The protocol also has its own native token, called Mirror Token (MIR). This is used to reward users who provide liquidity to the pool. It can also be used to earn governance voting rights and a percentage of the agreement’s CDP withdrawal fees.

Just like Dai, users invest their UST, aUST (earnings UST deposited on Anchor), or mAssets, and enter a mortgage debt position (CDP). This enables users to cast mAssets. Minters must maintain their CDP collateral ratio and can adjust it as needed.

Long and short farms are new content in Mirror V2. As they sound, they take directional positions on the relevant assets, but allow users to earn APR in MIR.

The short farm borrows mAmAsset for you and sells it on the market as UST. When you are done, you must repay the amount in UST (buy and return the borrowed mAsset). *

The song farm is basically an LP pool. You must provide mAsset and equivalent UST to get MIR rewards and pool rewards.

*Tip: You can buy the same amount of mAsset in the spot holding through the exchange interface to make your short farm delta neutral. This can be done on the basis of earning 20% ​​APY from Anchor, because Mirror allows you to use aUST as collateral! In this way, if there is a problem with your mAsset, you can use it as collateral. In this way, if your short mAsset rises, you will hold the equivalent value of the subject matter, thereby repaying your short position.

Haoyue Rising: Interpretation of the Holy Triangle of Terra Ecology

The mAssets on Mirror are traded 24/7, which means you can trade synthetic stocks on the platform outside of market hours. When the oracle price and the market price diverge, it can often provide interesting trading opportunities.

Part of Mirror’s unexpected organic growth comes from Thailand, which is its largest market.

Haoyue Rising: Interpretation of the Holy Triangle of Terra Ecology

mAassets are easy to move and redeem, for example, you can trade them on Uniswap on Ethereum or Pancakeswap on Binance Chain. Compared with Synthetix, Synthetix is ​​backed by a very high 600% mortgage rate (which erodes the capital efficiency of investors) and can only be used in closed-circuit systems like Kwenta Exchange.

The demand for synthetic assets drives demand back to UST, just like Anchor, guiding Terra’s ecosystem and providing value for Luna and UST.

6. Out-of-chain flywheel: Chai and Memepay

The problem with putting everything on the chain, especially the problem of pairing UST with an unstable currency like Luna, is that it becomes very susceptible to the ups and downs of the entire market. If the market declines sharply, the yield will also decline, and investors’ desire to borrow will also decline, which puts Anchor’s 20% annual interest rate flywheel in danger. Then, investors selling Luna to protect the value of their portfolios will weaken the leverage that keeps U.S. Treasury bonds linked. You can quickly see how the flywheel reverses and moves in another direction, and may create a death spiral.

To remedy this, TerraForm Labs needs to create demand for its stablecoins from outside the blockchain and the cryptocurrency-centric world.

Chai and Memepay are off-chain flywheels that provide organic demand for Terra’s native stablecoins such as TerraUSD and TerraKRW.

Haoyue Rising: Interpretation of the Holy Triangle of Terra Ecology

Chai

Chai App is funded by TerraForm Labs and launched on June 13, 2019. It is Terra’s premier payment network established on the Terra blockchain. The Chai app has a single purpose: to become the preferred payment app for Korean merchants. Although most payment apps target customers, Chai has made a major effort to prioritize merchants.

The reason they did this is that in Asia, there is a lot of friction around merchant settlement times. The fee per transaction can be as high as 2.7%, and the settlement time can take several days before the merchant can receive the money in its account. This will not work when working capital is tight and needs to be used on the same day or the next day. Just like taxi drivers often refuse to swipe their cards and only accept cash, because they need to use them immediately.

Chai eased this problem by simplifying settlement time (almost instantaneously) by using the Terra blockchain and cutting fees to 1.3%. Merchants can easily integrate Chai into their POS terminals through an SDK checkout service similar to Stripe. Currently, more than 1,700 merchants in South Korea have integrated Chai.

Haoyue Rising: Interpretation of the Holy Triangle of Terra Ecology

Haoyue Rising: Interpretation of the Holy Triangle of Terra Ecology

Chai App continues to increase their total users at a steady rate, with an average of more than 50,000 users per day, and the total number of users is 2.47 million. Data source: https://www.chaiscan.com/

Chai App continues to increase their total users at a steady rate, with an average of slightly more than 50,000 users per day. The total number of users is 2.47 million, and the transaction volume processed annually exceeds 2 billion US dollars. In terms of background, the total number of users of the Chai app is equivalent to about 5% of the population of South Korea.

For end users, Chai also provides a feature called “boosts”, which are basically different types of promotions that merchants pay for appearing on the app. Customers can easily find discounts at merchants they are interested in, and click to use them. As of May 10, 2021, after Chai integrated the Terra Station mobile network, Korean users no longer need a bank account to recharge their KRT deposits.

Haoyue Rising: Interpretation of the Holy Triangle of Terra Ecology

In order to get our flywheel back, here is what happens when a South Korean Chai card user buys stablecoins.

1. Purchase KRT (a stable currency linked to the Korean won by Terra) worth 1 USD

$2.1 Luna was burned

3. Luna’s supply shrinks, creating pressure for price increases

4. Higher Luna price creates greater value and stability for the token, which creates stronger support for linking with UST

Memepay

In 2019, a similar application was launched in Mongolia, called MemePay. Its function is both remittance and a payment application like Venmo, which can be used online and offline. The application uses MNT (a stable coin that Terra is linked to Tugrik, Mongolia). The usage of the app is much smaller than Chai, only 3% of Mongolian population uses it, with approximately 90,000 users.

Haoyue Rising: Interpretation of the Holy Triangle of Terra Ecology

Other notable applications

1. The Alice app + card will use Anchor’s rate of return to pay a portion of dividends to users in a user-friendly way.

Haoyue Rising: Interpretation of the Holy Triangle of Terra Ecology

2. Orion Money

Orion Money’s vision is to become a cross-chain stable currency bank, providing seamless and frictionless stable currency savings, lending and consumption. In the Orion Money stablecoin bank, there are three main products planned-Orion Saver, Orion Yield and Insurance and Orion Pay.

Currently, you can deposit a large number of stablecoins on the Ethereum network to obtain Anchor’s rate of return.

Haoyue Rising: Interpretation of the Holy Triangle of Terra Ecology

3. Pylon agreement: is a set of savings and payment DeFi products, based on the Anchor agreement, to provide users with services. As can be seen from their documents, “Pylon introduced a new model for payers and payees, consumers and creators, patrons and artists, investors and entrepreneurs, borrowers and lenders, and More incentive adjustments between relationships”.

Currently online is a fair project startup platform called Pylon Gateway, which allows crowdfunding with yields. The user deposits UST into a pool to obtain a share of the token distribution. The project’s tokens will be distributed proportionally according to the investor’s share in the pool. The token “MINE” of the Pylon protocol imitates Luna’s coinage/burning effect in the UST mechanism, and absorbs the value of the tokens launched by the project on Pylon. Among the returns generated by the project start-up, as much as 10% will be used for MINE repurchase.

4. Loop Finance-The first AMM Dex on Terra

5. Mars Agreement-Terra’s loan agreement will issue secured and unsecured debt to users. Users can earn agreement fees by betting on MARS (similar to sushi).

As of today, according to @Josephliow, about 50% of upcoming Terra projects plan to use Anchor’s proceeds in some way.

Haoyue Rising: Interpretation of the Holy Triangle of Terra Ecology

For a large list of existing and upcoming projects on Terra (but not all!), please see this article by @FlynnToTheMoon.

. What is the future of Terra? What is Columbus-5 and how does it change the rules of the game?

The Terra ecosystem is growing at an alarming rate. The figure below is from Anchor Protocol, which shows the increase in deposits and borrowed USTs over time, followed by the value of Luna collateral locked in the agreement.

Haoyue Rising: Interpretation of the Holy Triangle of Terra Ecology

TerraUSD (UST) has broken into the top five stablecoins by market capitalization, but there is still a big gap to reach the level of the major leagues. Nevertheless, with so many coins failing, the performance next to Dai is an impressive feat, and it is the only algorithm coin in the top 9. Do Kwon said that his goal for UST is to reach $10 billion by the end of the year, or five times the current growth rate.

Haoyue Rising: Interpretation of the Holy Triangle of Terra Ecology

Haoyue Rising: Interpretation of the Holy Triangle of Terra Ecology

What’s next for Terra? The next biggest update is Columbus-5. It has some key differences from many of the mechanisms we just discussed. Here are some important changes in the proposal:

1. The distribution of seigniorage. Currently, the agreement directs all seigniorage to community funds (used to fund projects in the Terra ecosystem), but due to the rapid growth of UST in the past year, the fund is currently in excess of funds. Col-5 will burn all seigniorage.

2. Exchange fees. Currently, all exchange fees are burned. In Col-5, the exchange fee will be allocated to the pledger. As the ecosystem continues to evolve, this should increase the rewards for Luna pledgers. Remember, the benefit of this is to increase the stability of the UST link (supported by growth!).

3. Some technical changes, such as cosmos-SDK upgrade and oracle performance optimization.

4. Terra will include Cosmos’ IBC module, enabling Terra core to “talk” with all tendermint-based chains. This introduces a new interactive world for Terra.

5. These funds will be used to fund Ozone, an insurance agreement that insures the Terra DeFi ecosystem, instead of burning excess community funds. This will first create insurance for the Anchor agreement.

8. Conclusions and opinions

Do Kwon has a huge vision for Terra, and they have sufficient capital to achieve their goals. The role of the protocol, on-chain and off-chain three flywheels is to directly promote the demand for UST, which makes Luna more valuable through the combustion mechanism involved, thereby reflexively strengthening the link of UST. Terra’s cross-chain expansion and partnership vision creates additional demand for UST and Terra products, and will continue to strengthen the network.

Since Anchor is the key to the ecosystem, I do believe that it may be too large to collapse. But I have some doubts about ANC liquidity mining to encourage permanent borrowing. When ANC is no longer useful, no one may need to incentivize borrowing from Anchor, and the training round will fall off.

In the ill-fated days of May, the UST link is worrying, but this is a technical problem, that is, the transaction overload from Anchor is full of nodes used to read the price of the oracle, rather than the UST linking stability mechanism. There are more fundamental and serious flaws, which comforts me. Soon after the market turmoil, Anchor did introduce some changes to reduce the number of clearing transactions. These transactions would clog the network and “squeeze out” the oracle vote. Columbus-5 will provide more mempool priority, which can eliminate this problem. Strangle in the bud and prevent similar days from happening again. Since then, there will be no more than 5% deviation in the link.

On Columbus-5, the rewards for pledgers have increased while continuing to expand UST. This may be the “zhupercycle” catalyst that Luna needs, which will enable it to enter a long-term growth period.

Haoyue Rising: Interpretation of the Holy Triangle of Terra Ecology

The above chart from @The_Babylonians shows the way to reach the Dai level of UST, and I think it is not impossible that this will happen within a year. After all, users desire fixed income in an ecosystem that represents the spirit of decentralized finance and cryptocurrency. This is a very convincing argument.

Disclosure: I currently do not have any investment in the Luna or Terra ecosystem.

 

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/haoyue-rising-interpretation-of-the-holy-triangle-of-terra-ecology-2/
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