What do you think of when you hear the word ecosystem, most people, think of nature, Maybe a jungle that contains plants and fungi and snakes, small mammals, birds, bacteria, and everything that requires a whole system to function on its own. All these organisms use each other to survive in different ways. They are independent and they rely on each other.
That’s what makes an ecosystem work. So if you heard the word financial ecosystem, what would you think the idea is the same? It’s a collection of different people, organizations, processes, and systems that, let us all, buy and sell things use money, save it, invest it and everything else related to finance. Let’s take it a step further.
1. Crypto Financial Ecosystem
What about the phrase Crypto financial ecosystem? Now, this is a whole new arena. The crypto world may have some isolated individual projects, but what it needs is an ecosystem.
In this article, we are going to explain what the Terra ecosystem is, and how it’s currently a working algorithmic stable coin. What on earth does that mean and what opportunities lie waiting for you to take advantage of. So what is the Terra blockchain in simple crypto terms? Terra is a proof-of-stake blockchain, intended to maximize the potential advantages of crypto for the financial world, focusing on both a mass payment processing system, as well as a creation of a useful, stable coin.
2. Payment Processing
Let me explain the payment processing side quick and then we’ll get on to the cool part, the algorithmic Stablecoin, so first off visa, MasterCard, or American Express aren’t working for anything. They take around two to three percent of every transaction that they help with. In fees that the merchants pay to the credit card company now for us, this doesn’t sound like a lot, but if everyone goes into a gas station and buys one bag of flaming hot Cheetos for two bucks, those fees start to add up.
So back to the payment processor, the key here is that Terra caps fees at one percent and that’s jUST the cap fees are usually much lower than one percent and you can see the benefits of merchants switching to the Terra blockchain.
Now, you might say other blockchains and other cryptosystems have done this before, but here’s what they haven’t done, because other than payment processing, Terra has other cool features that set it apart from other cryptocurrencies and even from other financial processes and products. So think about this question: Terra uses a blockchain right and Bitcoin uses a blockchain too. Well, what’s the difference? Why would a merchant want to use Terra when they could use Bitcoin? Well, here’s the thing, Bitcoin is volatile.
The value of Bitcoin measured in dollars changes constantly. I mean all day long. This is important because we usually measure things in dollars, whether that’s a bag of candy, a car payment, or your rent, everyone thinks in dollar bills, the volatility problem inspired something called stable coins.
Now we have an entire article on stable coins and how they work if you’re interested in learning more. But the idea here is pretty simple: stable coins are simply cryptocurrencies that are pegged to fiat currencies. So if people have measured their wealth in these fiat currencies and they use this fiat currency most consistently, they don’t want to use something like Bitcoin, which could change value because nobody wants to be that guy, who spent 10 000 Bitcoins on some pizza at the time.
It may have been only 20 dollars worth, but if they spend it, people fear that there may be a chance. It could go up and if they accept it as a purchase, they also have a fear that maybe the price could go down now. The core idea here is that we want to create a separate channel for one to make payments and another to invest in.
5. Volatility of Terra
We don’t want them to be the same thing. We want our money to have a stable value so that we can expect that it will be worth the same thing tomorrow and the next day, and hopefully the next year. Terra solves this by using a stable coin algorithm that allows certain tokens on the network to stay at a single price, so Terra has a stable coin for several different currencies like the US dollar, which is represented as UST.
The Korean wan is represented as KRT and the euro is represented as EUT. Now, these are simple ways of using cryptocurrency to transact in a simpler, faster, and cheaper way than before. So simply put Terra is attempting to bring the advantages of crypto to defy all of those decentralized applications but without the volatility and unpredictability of the prices.
Now I know exactly what you’re thinking, at least, if you’ve read our other articles, algorithmic stable coins never worked well. So far, Terra has worked. I’m going to bring up the recent titan and iron finance algorithmic stable coin crash because it seems similar well when we dig into why they crashed.
It was mostly because there was no reason to hold titan or iron other than to use them to make more money, and this was essentially a Ponzi scheme in the crypto world. Now I venture to say that Terra is different because they created a stable coin with a purpose. Terra is built around an entire blockchain ecosystem for all the daps and platforms to use, while titan was simply a get-rich-quick yield farming opportunity that was pumped and dumped on, and even more so it was on someone else’s blockchain.
7. Value Derivation
Think about this even Ethereum itself, where does it get its value from? It gets its value from the ecosystem surrounding Ethereum, all the daps, and the smart contracts and protocols. This is exactly what Terra stablecoins are banking on as well. Now we may be wrong and Terra may crash in the future, but as far as the research that we have performed, this process has worked pretty far and it does appear quite different from the titan and iron finance death spiral.
Moving on, let’s talk about how they’re similar the Terra ecosystem holds two assets at its heart, the native network coin, which is called LUNA, and the stable coin, which is called UST. Now the power of LUNA is a bit different than in other projects because it is used to maintain the stable value of Terra, but the idea is the same. LUNA is a token that is used to keep the price of Terra at exactly one dollar.
It is also used for network fees. Let me explain how this works when the value of UST is mismatched to the value of a real US dollar. They use LUNA to incentivize people to do certain things to stabilize the price they do this, either by burning their UST or creating more of it to manipulate the value, and the people that proactively help the network stay stable, are incentivized with profits.
Alright, here we go if Terra is over a dollar. The answer is simple: you can always reduce the price of something by making more of it and that’s exactly what they do now you might be wondering who they give all these extra Terra tokens? Well, They give them to the people that trade in their LUNA tokens, but they do it for a very small, but also important profit. Next, what happens if LUNA goes under a dollar, how do they bring it back up? Well, if it goes under a dollar, you can trade your Terra coins in for a dollar value of LUNA, again making a very small but meaningful profit.
10. Why LUNA
This means we can shrink the circulating supply of Terra, causing the price to go up now. You might be wondering the same question that I was wondering: where does all of this everlasting profit come from? That is a great question and here’s what I found out the profit seems to come from money flowing into the ecosystem as more and more people buy, UST, LUNA will grow in price, although it does seem to happen that a small portion of this profit goes to Those who help keep UST stable, however, when people start taking their money out of the ecosystem, LUNA will fall in price, so the value is taken from people who hold the LUNA token. Now, this brings us to another question: why on earth would you hold LUNA? Well, you can hold LUNA for two reasons, if you’re bullish on the Terra ecosystem and you think that more people will come into it, and two if you want to do anything on the Terra network; you have to hold LUNA as LUNA is the native coin. That allows you to do things, so this immediately makes it very different from the death spiral that titan and iron finance experienced. Nobody had any reason to buy titan and iron other than to participate in the Ponzi scheme.
Terra gets its value because people can use this stable coin for stuff across the ecosystem. Speaking of that, what can you do with Terra now, as we mentioned in the beginning, Terra is more of an ecosystem of many different crypto projects, to simplify transactions by using stablecoins and using those stablecoins to allow the use of financial tools in a way that is easier for people to understand and think in dollar amounts. So terra has two big protocols called anchor and mirror first of all, the mirror protocol, allows for the creation of what they call assets.
Representations of other assets are very similar to exchange-traded funds or ETFs on the stock exchange. Now that was a bunch of fancy words so that means you can buy US stocks or precious metals Like gold or even European real estate, no matter where you are in the world without anybody’s permission and you can do it fractionally.
I think this is a great idea and it’s actually been used and working for like two years now, but it does use something called synthetic assets, and some experts have an issue with that. Overall, though, the mirror protocol brings people to buy LUNA and UST next up, the anchor protocol uses the staking mechanism of Terra to create what are basically savings accounts and right now I think they’re paying like 20 percent.
So you deposit and save your stable coins and you earn a certain percentage rate on your coins. Just like traditional savings accounts are supposed to work now this incentivizes people to keep their Terra on the ecosystem. So the way that I see it mirror gets people to use LUNA and UST and anchor keeps people using LUNA and UST.
One last thing I want to mention is that Terra was created using the cosmos blockchain. Now the name isn’t super important, but it means that terra is built to be able to integrate with many other blockchains, specifically for interoperability right from the foundation. Again, this emphasizes Terra’s focus on an entire ecosystem of d5 products and services, and I could probably create a whole article on this, but near the end of this article.
13. Terra's Future
I want to ask the question: what is next for Terra, from the beginning this was a very ambitious project, it’s in good hands, and it has a lot of potentials to grow. Terra was created by Daniel Shin and Do Kwan graduates of the University of Pennsylvania and Stanford respectively, who are each successful in their own right before creating Terra. Right now, Terra is targeting payment processing systems, specifically in a few Asian countries like South Korea and Taiwan and it has been successful on average, I think it saves merchants like 1.5 percent on transactions with a payment processor that uses Terra and that is called chai and chai has been growing rapidly among the consumers in the Asian markets, actually eclipsing Bitcoin cash and even Rivaling litecoin, as of 2019, so as a whole ecosystem, can go in many different directions, but they are currently targeting something similar to an incubator model.
What they’re wanting to do is invest further in different use cases of Terra like the dapps, which would significantly increase user growth. They’ve got things like mirror and anchor, and they want a bunch of other dapps that will help people get users excited about using the network. Personally, whatever direction Terra takes, they are going to be a coin in a system that I keep my eye on.
Ending this article, I hope you guys enjoyed this article.