Terra Luna Report by Jesse

Bitcoin reaches a new all-time high this week and it still feels like the beginning of what’s to come. Lots of people taking some well-deserved profits from holding through the crypto winter. With most of us expecting those gains to move into the low/mid cap coins over the coming months. One of those coins with the potential to possibly enjoy this process is Terra Protocol.

Introduction

The goal at Terra Protocol is to repair an inefficient payment industry by introducing a more efficient means of payment. Within the current infrastructure, payments from one party to another using different currencies can take up to ten business days for processing. This unnecessary lag has slowed the adoption of digital payments, especially in Southeast Asia where middlemen gouge users and vendors with high fees and take home more than $15 billion dollars a year. Since the value of a currency as a medium of exchange is driven by its network effects, a new digital currency would need to maximize adoption to become useful. Nobody wants to pay with a currency that has the potential to double in value in a few days or wants to be paid in a currency if its value can decrease before the transaction is settled. At the core of how Terra Protocol wants to solve these issues is the idea that a cryptocurrency with an elastic monetary policy would maintain a stable price. Retaining all the censorship resistance of Bitcoin, and making it viable for use in everyday transactions. Terra Protocol wants to offer strong incentives for users to join the network with an efficient fiscal spending regime, managed by a Treasury, where many stimulus programs compete for financing. One where proposals from community participants will be vetted by the rest of the ecosystem, and when approved, financed with the goal to increase adoption and expand its potential use cases.

Built using the Cosmos SDK and Tendermint (PoS) consensus algorithm. Creating self-regulating stablecoins TerraUSD and TerraKRW, these are collateralized by an additional native token called LUNA. Terra has a proof-of-stake ecosystem, where Luna is the staking coin. To stabilize the price of Terra, Luna acts as a counterparty to anyone looking to swap Terra and Luna at Terra’s target exchange rate. Giving users the ability to swap TerraKRW for TerraUSD at the effective KRW/USD exchange rate. This also allows all Terra currencies to share liquidity. Recognizing strong regionalism in money, Terra aims to be a family of cryptocurrencies that are each pegged to the world’s major currencies. The protocol intends to issue Terra currencies pegged to USD, EUR, CNY, JPY, GBP, KRW, and the IMF SDR. Over time, more currencies will be added to the list by user voting. With the importance of Terra currencies to have access to shared liquidity. The system will support atomic swaps among Terra currencies at their market exchange rates. All Terra transactions pay a small fee to miners. With fees defaulting to 0.1% and capped at 1%. Meaning that transacting with Terra in e-commerce will be much cheaper than transacting with traditional payment options like credit cards.

With many markets available, the system must rely on decentralized price oracles to estimate the true exchange rate. Once the system has detected that the price of a Terra currency has deviated from its peg, it must apply pressures to normalize the price. Like any other market, the Terra money market follows the simple rules of supply and demand for a pegged currency. Like most other assets, money needs to be bought from the market. So when price levels are falling below the target, reducing money supply returns price levels to their pegged value. Or when price levels are rising above the target, increasing the money supply will return price levels back to the pegged value. It’s this self-regulating mechanism that makes Terra different from other stablecoins currently available on the market. Initially, the team at Terra was to only develop one native TerraSDK token. But, finding that a currency needs to keep its purchasing power with respect to local currency if it’s to be widely adopted as a domestic unit of account. A single Terra currency was deemed no longer an option because of this.

In the same way central banks and governments absorb the volatility of the pegged currencies they issue. Terra miners absorb volatility in the Terra ecosystem. In the short-term, miners absorb Terra costs through mining power dilution. During a contraction, the system mints and auctions more mining power to buyback and burn Terra. This contracts the supply of Terra until its price has returned to the peg, and results in mining power dilution. In the mid to long-term, miners are compensated with increased mining rewards. First, the system continues to buy back mining power until a fixed target supply is reached, creating long-run dependability on available mining power and increasing rewards in the process. Miners bear the costs of Terra volatility in the short-term while being compensated for it in the long-term. As Luna is minted to match Terra offers, volatility is moved from Terra price to Luna supply. The system burns a part of the Luna it has earned during expansions until Luna supply has reached its 1 Billion supply issuances. Giving Luna more demand as a token with pro-rata rights to Terra mining over the long term.

Currently utilizing the Terra Protocol is the CHAI dApp. Partnering with Terra in June of 2019, CHAI is a popular mobile payments application that has been offering seamless payment with large mainstream merchants in Asia. CHAI has to date, partnered with fifteen major local banks to facilitate fiat on/off ramps, and recently crossed 2 million monthly active users with over $5 million USD in daily transaction volume. CHAI’s strengths have come from seamless user-facing experiences built with the Terra blockchain-powered infrastructure. Lowering transaction fees and facilitating efficient settlement with merchants in Asia is important to both parties. With CHAI providing the infrastructure of a payment gateway and convenient settlement with merchants in fiat. Terra’s blockchain technology through CHAI, will help build a payments stack on the blockchain to simplify the legacy payment system and provide transaction fees at a discounted rate to merchants. Helping to facilitate some of these processes within Terra is Anchor Protocol. Beginning with Anchor v2, Terra protocol’s built-in swap function (in the market module) began being used for liquidations. But the problem was that the goal of the swap functionality wasn’t aligned with that of Anchor. As on-chain swaps are used in the stability mechanism for Terra stablecoins. Anchor shouldn’t have to make changes to the protocol layer just for Terra’s specific application. So starting with v2.1 borrowers are required to buy put options that cover 100% of their borrowing position. As all CDPs are covered by put options, Anchor can then provide a principal guarantee for the borrowed Terra assets. Additionally, Terra was also utilizing the Lunie staking app to allow users convenience in staking LUNA. But, on November 5th, 2020 Lunie announced that at the end of November 2020, they’ll be shutting down the web app, mobile app, and browser extension. As a non-custodial service, users can still import their backup (seed phrase) to the Terra Station. More information on currently staked assets can be found in the Terra stake viewer.

The Token

Terra ended it’s LUNA token sale in March of 2019 using the Opentoken platform. Initially, the team was looking to raise a whopping $72M USD for 20% (200M) of the total of 1B LUNA supply. But, they were only able to raise $10M USD of their targeted amount at $0.80 USD per LUNA. After much time spent searching Discord, Telegram, and GitHub I was unable to find any released information on token distribution beyond the initial sale. So I’m unable to confirm any token metrics, use of funds, seed/private funding, or any other information pertinent to proper token evaluation. Moderators in the social channels have continued to respond to any of these questions with a future announcement of token distribution metrics dating back to last year. With no metrics being released yet after 21 months, further on-chain research would need a significant amount of time for clarification into the 474B circulating supply.

Token functions are managed through the use of the Terra Station. Where users can stake, issue contracts, and take part in governance. While in the station LUNA is bonded, considered staked, and generates rewards for the delegator and validator it is bonded to. LUNA that is instructed to be undelegated from a delegator transitions into an “unbonding” state during which neither rewards accrue and the LUNA can eventually be traded again. This unbonding phase takes 21 days to complete, after which the bonded LUNA returns to an unbonded state. Terra has built the Terra Explorer to better identify these actions and everything else happening on-chain.

The Founders

Developing the project is TERRAFORM LABS PTE. LTD. incorporated as an exempt private company limited by shares on April 23rd 2018 with no IPO and a paid-up capital of $2 USD. Developing business interest for the company is Co-Founder & CEO Do Kwon, Portfolio Manager Sangmin Yeo, Head of International Business and Strategy Rahul Abrol, Head of Engineering Hanju Kim, Head of Research Nicholas Platias, Core Researcher Nicolas A., Senior Portfolio Manager Daehyuk Yu, Ecosystem Development Associate Sarah Kim, Business Development Lead Jeff Kuan, HR Manager Bomee Lee, Finance Manager Heejin Lim, VP Of Engineering Alex Kim, Product Manager Stanford Liu, Community Lead Aayush Gupta and Chief Financial Officer C.J. Changjoon Han. Currently Terra has a few more than a half dozen individuals on the engineering side but is looking to expand much more than that with ten available openings at Terraform Labs.

Participating in the token sale is Binance Labs, Huobi Capital Group, Monex Group, Polychain Capital, FBG Capital, #Hashed, Dunamu & Partners, Kenetic, Arrington XRP Capital, Passport Capital, HOF Capital, Translink Capital, Kakao Ventures, GBIC, Nirvana Capital, Struck Capital (formally) Divergence Digital, Alphanonce, Kakao Investment, and Korean startup accelerator NEO PLY.

Market Impacts

After the token generation event in May 2019, the price of LUNA hit the market above $3 USD and immediately began its steady decline breaking below the $1 USD mark by the following September 2019. Since then it’s not recovered above the $1 USD mark, floating between $0.30-$0.40 for the entirety of 2020. In social media channels, the project has gathered a moderate following on Telegram with over 1k followers, Discord with around 200 users, and Twitter with a predominantly bot based following of 15k followers. Terra has issued a Bug Bounty program to engage with potential developers and engineers. But, otherwise has failed to grab the attention of the blockchain community. To clarify this further, In the hours spent researching Terra social channels, only one community member post was made in Telegram.

Concerns

Unfortunately, there have been almost no network effects for Terra Protocol. As much of their time being spent is on the project’s Github, the project itself has failed to drive further adoption through their own means or that of the CHAI dApp. Coming up on almost two years of operation the onboarding of new users to CHAI has almost come to a halt as more interest has grown in DAI and other more useful stablecoins.

Already priced into Terra’s market cap is the long-term goal of reaching 30M monthly active users. But, only a little over 2M users have utilized the CHAI dApp for Terra services. This means that Terra’s evaluation of the $189M USD market capitalization is inflated by almost fifteen times its actual user base. While I don’t doubt that over time they’re very likely to reach that 30M user goal. There’ll be little monetary benefit for LUNA holders when that happens. Without more information available about the distribution of almost half the LUNA total supply, this furthers my outlook on the lack of benefits for new participants.

Finally, an audit conducted by CertiK was performed in May of 2019 and found that many functions or features of the protocol served, well, no function at all. Causing non-deterministic execution orders that would create a non-deterministic persistent state. Other issues found were unwarranted panics for non-bug errors where an already existing return path can cause unexpected program exits and false negatives creating costly parsing operations. This helps to explain why Terra’s Go/Cosmos SDKs in both Python 3 and JavaScript, are not seeing any interest in development by the community.

Conclusion

For Terra, it’s going to be a slow rise in driving the adoption of its technology to the masses. While nothing extremely off putting about the project, the lack of socially driven metrics is heavily restricting the potential for LUNA to be widely used in Asia. With $10M USD considered a small amount of funding in the blockchain world, Terraform Labs has supported a rather large team for development in the project. While I don’t expect the team to throw in the towel anytime soon. I am curious to know how they’ll continue funding the project without prioritizing the onboarding of new users into the CHAI dApp. As with anything else, a large investment from outside sources or pump of the LUNA token can potentially add the winds Terra needs to sail into more relevancy. But, the risks associated just aren’t worth the possible reward at this stage in Terra’s development for most.

Until next time, remember that the only guarantee is BTC. So keep stacking that Satoshi.

-Jesse Koz

#MrHarrilasagna

Follow Jesse on Twitter

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