Goodbye, Moonman. Hello, $LUNA. An In-Depth Fundamental Analysis on Terra

This fundamental analysis is a sneak preview of an up and coming premium newsletter from Crypto Consulting Institute. For more information visit: https://www.cryptoconsultinginstitute.com/newsletter

If you’ve spent five minutes in cryptocurrency forums, you’d have no doubt come across the trope proposition of ‘When Moon?’.

Following a review of the history of crypto price action, it isn’t a stretch to wrap your head around investors fixation on astrological allegories. In one day, we have seen crypto assets outperform a given stock in an entire year. Volatility in the crypto markets is often out of this world.

The irony is, many cryptos that take people to the ‘moon’ are not ones that have anything substantial behind it, other than a flock of highly suggestible uneducated investors.

Bob tells Fred that Mooncoin is the next token to pump and invites him to a Mooncoin forum. Fred gets exposed to the hype and unrealistic price predictions, prompting him to overexpose himself to an asset with no fundamental value. Fred either makes life-changing wealth by reducing exposure at the opportune time or scratches his head as to how the value of his investment could drop 80% in one day.

Once you understand the fundamentals of cryptocurrencies and come across an asset that calls itself $LUNA, you would not be faulted for dismissing it as another ‘Moonboy’ token.

But there is much more to it than promises of a trip to the moon.

Your D.I.S.R.U.P.T. TLDR takeaways:

Developments

· Terra Labs recently completed Columbus-5 upgrades to their mainnet.

· Wormhole is the most recent development that lays the groundwork for interoperability with Cosmos, Solana and other EVM blockchains.

· Terra Labs expect 60 dApps to launch in the next 6–8 weeks, with an additional 100 projects planned for up until early 2022.

Investors and community

· Terra ecosystem attracted $150M of investments. Panthera Capital, Binance, Huobi Capital, and Arrington XRP are the most notable investors.

· However, 56% of the total supply is owned by VCs and the Terra Foundation team. This distribution does not inspire confidence from investors. That said, Solana also has a similar distribution and showed no signs of market suppression based on price action.

· As of 20/10, Lunarcrush rates $LUNA an Altrank of 11/3155 and Galaxy Score of 72, giving them an overall rating of #21 in social dominance.

· The primary Terra Twitter has 172k followers, retweeting many of the protocols yet to launch on mainnet. 25k followers on Telegram. 15k members on Discord. 12k members on Reddit.

Story (narrative)

· Decentralized stablecoins are put forward as the solution to the uncertainty around stablecoin regulation (Tether FUD).

· Interoperability narrative — the sector recognizes the opportunities in performing transactions across chains. Wormhole is one solution to the challenge of unifying blockchains and liquidity.

· ‘Get them to use it, without knowing that they are using it’. A meaningful goal for blockchain technology is to offer a user-friendly service whereby users are not even aware they are operating on the blockchain, nor do they need relevant knowledge.

· A decentralized alternative to Robinhood. Mirror protocol built on Terra allows people to put down collateral to purchase leveraged ‘mirrored’ assets, such as stocks, commodities and crypto on other blockchains.

Regulatory risks

· Tether is under the SEC microscope to assess their status as a security and their capacity to enable redemption of $USDT into fiat denominations.

· Do Kwon has stated that should $UST be the subject of an SEC probe, they will dissolve Terra Labs and burn all of the teams $LUNA allocation. Whether they follow through on this declaration is yet to be seen. Should they dissolve the company, no entity will be accountable to the SEC for the $UST redemption of $LUNA collateral.

EDIT: On the day of publishing this FA, Do Kwon has opened a lawsuit against the SEC. One would imagine Do Kwon wouldn’t push a lawsuit against them unless he were ready to dissolve the Terra Labs if it doesn’t go their way.

Unique Selling Proposition

· Terra’s USP is primarily the algorithmic process for collateralizing $UST, building protocols that assert a use case for $UST and $LUNA. More application for these tokens leads to increased total value is locked.

· Terra will soon be interoperable with Cosmos and Solana ecosystems to unlock further utility for the Terra blockchain and respective tokens.

· The biggest strength of Terra is also its biggest weakness — there is a history of decentralized algo-stablecoins that have not succeeded (re: $IRON stablecoin losing its peg from price movements of their collateral asset, $TITAN)

Product

· Terra mainnet is fully operational and is the backend to payment apps in South Korea and Mongolia that utilize $UST. Memepay and Chaipay have over 3M users and around 50k unique users daily.

· Anchor protocol gives an interest return on the $LUNA used as collateral to take out $UST loans. That’s right, you get paid to take out a loan (12% at the time of writing). You can then stake that $UST to generate further interest (19%).

· Furthermore, there is a myriad of dApps that will enhance DeFi capabilities on the Terra blockchain. Including, but not limited to, insurance protocols, fixed yielding assets, synthetic assets, borrowing/lending and leverage trading

Team

· Do Kwon is the co-founder of Terraform Labs. He was listed in the top 30 wealthiest people under 30 and previously worked as an engineer for Microsoft and Apple, experienced in AI and networking protocols.

· Daniel Chin is a serial entrepreneur that has spent the last ten years building companies. Most notably, Daniel founded TMON, South Korea’s leading e-commerce platform that has integrated with the Chaipay app. He was also a co-founder of Terraform Labs.

· Terra Labs team focus on infrastructure (about 50 people) and payments app solutions (about 100 people). Up to 170 people are contributing in total. Not a business, doesn’t seek to make money, team tokens sustain operations, intends to dissolve the foundation in the future along with the remaining allocation of team tokens.

Value Proposition
Terra-forming the crypto landscape.

So, what is Terra?

Terra is a layer 1, proof-of-stake blockchain built with the Cosmos software development kit (SDK) that processes 300 transactions per second. The network currently consists of 137 validators that double as oracles. This function enables nodes to receive price signals and relay that information to the algorithm to manage stablecoin peg to fiat denominations.

The primary function of the Terra blockchain is a decentralized payment network that utilizes Terra stablecoins, e.g., TerraKRW is pegged to the South Korean Won and is being used in several payment apps to achieve settlement within 3 seconds. The technology challenges the antiquated rails of the traditional payment systems that often take days for banks and merchants to settle. Many different blockchain-based payment solutions exist, but many utilize the native token of their project.

“Intuitively, 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 significantly decline before the transaction is settled” — Terra Money Whitepaper

Terra US dollars ($UST) is the ecosystem’s primary stablecoin algorithmically collateralized by $LUNA. However, Terra stablecoins can be diversified and pegged to any regional fiat denomination.

Terra node validators also operate as an oracle to relay price signals for the algorithm to action. Those staking on validator nodes receive rewards from transaction fees rather than receiving freshly minted tokens.

Furthermore, Terra’s vision is to foster the growth of an ecosystem of decentralized financial products premised on utilizing the $LUNA token and $UST tokens.

The goal is to create a payment and economic infrastructure that is decentralized. It becomes more lucrative when you remember that Terra is the backend infrastructure for popular Asian payment apps, such as ChaiPay, with over 3 million users, most of whom are unaware they are settling payments off the blockchain.

Terra seeks to create resilience in $UST, foster greater TVL and upward price action of the $LUNA token by implementing interoperable solutions to enable their flagship tokens to find use cases across multiple blockchains. Slowly but surely, $UST aims to progress further up the stablecoin rankings.

Terra Ecosystem

It doesn’t take a rocket scientist to take you to the moon… oh, wait…

The Terra Labs team are building a burgeoning ecosystem of dApps. However, two of the earliest products warrant an in-depth mention.

Anchor protocol is a borrowing and lending platform where users are paid $ANC to collateralize their $LUNA to take out a $UST loan. Yes, that’s right, you get paid to borrow. The initial impression of this scheme is that it has the hallmarks of a Ponzi, but based on the design, it is said to be sustainable for up to three years.

On the most basic level, when you collateralize $LUNA, you bond it to a Terra blockchain node that produces a return on the staked asset. This system will expand to other major blockchain tokens such as $ETH, $BNB, $SOL, $MATIC, etc., as interoperable capabilities continue to develop.

Loans are overcollateralized, so you may put $100 worth of $LUNA down to receive 50 $UST.

There are three paths you can take with your $UST loan.

You can utilize it elsewhere and trade $UST for another asset. Terraswap protocol is a fork of Uniswaps automated market maker that enables the swapping of assets on Terra.

You can compound your $UST loan back into the lending pool to receive a stable return of around 20%. With this approach, you also can take out $UST peg insurance and smart contract insurance. In addition, Ozone protocol will utilize a portion of the $3B community fund to supplement earning interest on $UST loans.

Where it gets interesting is you can lend your $UST back into the pool and take your receipt of lending, $aUST, over to Mirror Protocol. $aUST can be used as collateral to synthesize tokens derived from alternative market assets such as stocks, commodities and cryptocurrencies ($ETH and $BTC are currently available) — oracles relay price signals to mirrored assets. You can use your synthetic or unbonded collateral to take out long or short positions on these assets. The value proposition is similar to CFDs, you don’t own those assets, but you own a mirrored tokenized representation of them.

While this may sound complicated, and it is, keep in mind Terra Lab’s vision to make these products simple enough to be used through mobile apps. The user is unaware or does not need to know how to traverse the blockchain to access these products.

The relationship between Anchor and Mirror protocols is worth exploring, it illustrates how $LUNA and $UST tokens collateralize many interconnected financial instruments throughout the Terra ecosystem.

In addition, Terra Labs seeks to launch the Harpoon protocol that enables non-technical users to purchase liquidated collateral from Anchor protocol at a premium discount. Savings accrued from yields on Anchor can be redirected to Pylon Protocol in the future to bootstrap new projects launched on Terra. Mars protocol will enable uncollateralized lending. Stader labs will provide liquid staking and yearn finance style staking on Terra.

The list goes on and on. When you factor in ongoing developments of Interconnected blockchains (IBC) routes enabled by Wormhole, $UST and $LUNA will be more accessible to all major blockchain ecosystems to further lock value into those protocols. $UST is currently in circulation on the Binance Smart Chain, Solana, and Ethereum. There seems to be no end in sight to the applications of these tokens.

$LUNA and $UST Tokenomics

Without the moon, there’d be no tides.

$UST Tokenomics:

The process for algorithmically maintaining $UST supply and peg to $1 is as follows:

· When $UST goes above $1, that equivalent of $LUNA is burnt to mint $UST. This feedback loop continues until $UST has restored its $1 peg.

· When $UST goes below $1, $1 of $LUNA is minted to buy back $UST. This buying pressure on $UST continues until the $1 peg is restored.

· $UST current supply: 2,734,812,524

· $UST is ranked 5th largest stablecoin by market capitalization.

$LUNA tokenomics:

· Circulating supply: 401,551,239

· Total supply: 970,904,812

· Elastic supply through burning and minting to maintain $UST peg.

· Maximum supply: 1,000,000,000

· Initial allocation (Extracted by Harsh Agrawal’s token analysis, link in references):

o Pre-Seed and Seed Sale: 189.5 Million

o Genesis Liquidity: 40 Million

o Terra Alliance: 200 Million

o TerraForm Labs: 144.386 Million

o Stability Reserve: 200 Million

o Employees & Contributor Pool: 128 Million(to be increased to 201.4 Million by May 31, 2022)

o Private Sale: 18 Million

· As of 22/10, $LUNA is priced at $42.80, ranking 11th by market capitalization at $17,204,843,854.

Proceeds from arbitrage activities for peg maintenance previously went to the community fund that currently holds over $3B in reserves. Recently, the community voted to burn the proceeds from algorithmic arbitrage, placing additional deflationary pressure on the supply of the $LUNA token.

There is approximately $10B of TVL in the Terra ecosystem.

Challenges and shortcomings

Falling in and out of Luna’s Orbit

The main stablecoins of the crypto market (USDT and USDC) are centralized. They are issued to centralized exchanges by a company that backs the value of their stablecoins by holding the corresponding value in cash and equities. Newly minted stablecoins are distributed to investors in exchange for a local fiat denomination.

Questions around how stablecoins are collateralized is a tenuous proposition that impacts the entire crypto market, given how heavily paired centralized stablecoins are with crypto assets. When you ask a well-versed crypto investor what the worst-case black swan event is for cryptocurrencies, you will hear “Tether FUD”. The likes of $DAI is an incredibly popular decentralized stablecoin that would also escape SEC scrutiny. However, based on their collateral mechanisms, it does not scale well.

It is a challenge for Terra Labs should $UST be under investigation as security. However, Do Kwon has stated they would dissolve Terra Labs if they became the subject of such an enquiry. EDIT: It appears that Terra is not afraid of inviting SEC scruitiny, hours after this FA was published Do Kwon filed a lawsuit against the SEC. They are willing to take the fight to them and would likely not have taken this course of action if they weren’t prepared to dissolve.

Head of the SEC, Gary Gensler, has stated that “[stablecoins] may very well be securities.” Once Terra is fully decentralized and the company dissolves, no entity can be accountable for assigning the likes of $UST as security.

It can go one of two ways if the black swan event were to come to pass and Terra Labs were to dissolve, then Terra Stablecoins could be the solution. The company could dissolve to escape accountability or scrutiny entirely as collateral is decentralised.

Terra Labs have a history of delays, not necessarily a dealbreaker if projects like Cardano are anything to go by, as these are complex undertakings. But delays do impact investor confidence and project reputation.

These delays raise the question that in the event of an SEC enquiry, will they have developed out enough of the ecosystem that it can take on a life of its own and not require the vision and oversight of Terra Labs?

Each day that passes, the answer leans more definitively towards ‘yes, but time will tell.

An additional threat to the stability of the Terra ecosystem is $UST based on the recent history of algorithmic stablecoins that had come before it and failed. Iron Finances $IRON token was a stablecoin partially collateralized by the $TITAN token and $USDC.

$TITAN saw a hefty sell-off, forcing the $IRON stablecoin below peg. Users purchased $IRON below peg to redeem for $1 of $TITAN and $USDC. The oracle operated on a time-weighted average price (TWAP) updated every 10 minutes $TITAN. An excessive rate of redemptions took place during these intervals, not allowing the TWAP to catch up. Supposedly, $TITAN was capped at 1 billion tokens. Yet, it was minted well above the cap, and arbitragers minted 22 trillion tokens into supply, all of which pushed the market value of $TITAN decimals below 0 and eliminated any chance of $IRON restoring its peg.

Terra Labs appear to have paid close attention to this cautionary tale and taken measures to protect their peg. They have accrued a sizeable community fund and offer $UST peg insurance for staking on Anchor Protocol. Right now, the ‘rainy day’ collateral that is the community fund outweighs the risk. $LUNA rising sharply in price can incentivize excessive seigniorage.

However, at the previous 50% market correction on May 19, the price of $LUNA dived, and $UST dropped to 91c. It took one week for $UST to restore the peg. But since then, the mint/burn parameters have been adjusted, liquidators that purchased $LUNA collateral at a 30% premium has now been reduced to 15% and have implemented an automated seigniorage system. Nevertheless, it is worth being mindful of these vulnerabilities of algorithmic stablecoins, particularly price oracle downtime.

The lack of available information on the initial seed investor and private sales for $LUNA is a concern. VCs own 56% of the total supply, private investors and the Terra Foundation. This distribution compounds the suggestion that Terra is indeed somewhat centralized in the sense that there is a concentration of $LUNA holdings that could suppress price and cause trouble in maintaining $UST peg to the dollar.

Finally, the concentration of tokens compounds into their issues with centralization, in the sense that Terra labs and the alliance are the primary developers of the ecosystem. Leading up to the dissolution of Terra Labs to achieve greater decentralization, it is not outside the realm of possibility that regulatory bodies apply pressure to dissolve the company before upcoming protocols are complete. Prematurely pulling the plug could leave the Terra ecosystem in fragmented disarray.

Discussion

One small step for man. One giant leap for a decentralized monetary network.

When digesting vast amounts of information to decide what would make a good crypto investment, it is helpful to consider it within the ‘Three A — access, adoption and application’ framework. More so, when it comes to projects whose goal is to have users on the blockchain without requiring them to know how it works.

Terra’s access to consumers is noteworthy when compared to competitors in the space. Crypto Dot Com has had tremendous success onboarding users, but their product still relies on antiquated payment rails through the use of a pre-paid debit card. To load up the card, the user still requires knowledge of cryptocurrencies and settle their payments in various fiat denominations. The many advantages of Terra integrating with mobile payment apps cannot be understated to achieve a settlement between consumer and merchant in up to 6 seconds. The cost of transactions is also significantly cheaper than traditional payment methods.

Further, Terra stablecoins settle these transactions. While deviation from the $1 peg is indeed a risk to be mindful of, the more trade volume on a stablecoin pair leads to seigniorage where the algorithm will invariably mint and burn $LUNA to manage deviations from the peg. As more fiat denominations are synthesized and used in payment apps, more arbitrage opportunities occur through seigniorage. Terra stablecoins are becoming increasingly available across at least 14 local fiat denominations. Including TerraSDR, a weighted basket of foreign currencies that the IMF uses as a peg for fiat assets. The stablecoins and the applications that settle payments with them can streamline the adoption of cryptocurrencies at a rate no one can anticipate.

Do Kwon has stated that he seeks to make products on the Terra blockchain accessible through mobile apps. It is not a small endeavour to have non-crypto users access Anchor and Mirror protocols without having some degree of blockchain knowledge. As DeFi products become increasingly accessible through mobile apps, we could see an exponential network effect in an accessible decentralized monetary layer.

As for the overarching ecosystem itself, we can see that the Terra ecosystem is ranked 4th by total value locked. That is impressive, but what is more impressive is the $LUNA market cap to TVL ratio. A staggering amount of value is utilized on Terra across at least eight different protocols. This is huge and, by comparison to other ecosystems and the value of their native tokens. It is not farfetched to think that $LUNA still has plenty of upside with an additional 160 protocols on the way leading up until early next year. Factor in that Wormhole will enable access to assets from multiple blockchains to diversify collateral for lending and synthetics.

Historical price data for $ETH, $BNB, and more recently $SOL, clearly illustrate the network effect that leads to the price appreciation of a native blockchain token when more applications become available. While we see TVL decline when liquidity begins to strike an equilibrium between blockchains. The products under development take the best parts of DeFi and make it their own by tying in the $UST and $LUNA elastic supply dynamic into the demand for stablecoins in all DeFi ecosystems. The more $UST locked up, the more $LUNA is burnt when demand drives $UST above peg.

Terra is a contender on every metric as far as the’ three-As’ go. This review may be enough to encourage you to invest in $LUNA. Despite the positive outlook, I would do so with caution. The regulatory risks that may prompt a premature dissolution of the company are real, as are the risks of algorithmic stablecoins.

If Terra Labs were prompted to dissolve, what might that look like?

Terra would start to take on a form similar to let’s say SUSHI in that their development agenda is approved by a community DAO and then contributors push development. The one criticism with that is sometimes you do need someone, like Do Kwon, to take the reigns and provide leadership and vision. At times, Sushi does have the vibe that they’re winging.

A really cool example of how DAO Governance can be a truly magnificent thing: With the Shoyu NFT platform being developed at SUSHI, the core contributor, LevX, put forward a proposal that he did not want to be paid anything from the community fund for his work. The community voted and disagreed by a significant margin — they wanted him to be properly remunerated for his efforts.

It is one of the most wonderful things I’ve seen in crypto. Terra would likely take a very similar path, but could perhaps do so more efficiently if it stays aligned with Do’s vision to create a blockchain where people are ‘using it — but don’t know they’re using it’.

To have holdings in $LUNA means you are watching both of these issues closely to manage your risk. As more applications for Terra stablecoins arise, this will create greater resilience for the $UST token and the broader ecosystem. But if it were to come undone, the cascading effect throughout the Terra ecosystem would be a meltdown of epic proportions. While that may sound doom and gloom, the project is in the hands of founders that are highly respected contributors in the crypto community.

That leaves us with one final question to consider: Is it worth putting some moonboots on for?

Yes.

A prediction of $60B of total value locked in the upcoming protocols on the network is not over-inflated. If this translates into increased utilization of the $LUNA token, we could reasonably hypothesize it to reach $150 per token. This is a conservative estimate that does not attempt to account for Terra’s best-case scenario whereby $UST becomes #1 stablecoin. Keeping in mind that demand driving $UST away from the peg leads to $LUNA being removed from circulation and burnt.

So, while $LUNA may sound like a name reserved for hype coins with no fundamental value, it is well deserved for how Terra Luna will likely disrupt traditional payment rails going into the future.

References

3commas, Terra — Stablecoins for all
https://3commas.io/blog/terra-stablecoins-for-all

Anchor Whitepaper: https://anchorprotocol.com/docs/anchor-v1.1.pdf

Changehero Blog, What is Terra (LUNA)? A beginner’s guide
https://changehero.io/blog/what-is-terra-luna/

Coinbureau, Terra: Could LUNA Really go to the moon? March 2021 https://www.youtube.com/watch?v=7HLiZxkbxfY

Coinbureau, Terra: Why LUNA Could Moon on UST Demand!! September 2021 https://www.youtube.com/watch?v=uLmVtec0px4

Coincu — There are over 160 projects that will start on Terras (LUNA) next year
https://news.coincu.com/24729-over-160-project-terras-luna-early-next-year/

Coinsider, Is Terra’s $LUNA Worth the HYPE?! (Pros & Cons) https://www.youtube.com/watch?v=YUGHDVLFt5E

Coinsutra, Terra Network LUNA token analysis
https://coinsutra.com/terra-network-luna-token-analysis/

Cryptoslate, Over 160 projects will launch on Terra (LUNA) early next year https://cryptoslate.com/over-160-projects-will-launch-on-terra-luna-early-next-year/

Mirror Whitepaper V2: https://mirror.finance/Mirror_Protocol_v2.pdf

Medium, Terra: Could Luna Really Go to The Moon?
https://medium.com/general_knowledge/terra-could-luna-really-go-to-the-moon-fb0b2171f37a

Reddit, Bank run, Game theory, loss of peg.
https://www.reddit.com/r/terraluna/comments/of753c/bank_run_game_theory_loss_of_peg/

Reddit, Anchor APY Sustainability Explained, 6-part series: https://www.reddit.com/r/terraluna/comments/q92bij/anchor_apy_sustainability_explained_it_is/

Reddit, Terra is an ecosystem of stablecoins and this is why it matters for all of crypto. https://www.reddit.com/r/terraluna/comments/p8m4s1/terra_is_an_ecosystem_of_stablecoins_and_this_is/

Sheldon Evans, TERRA LUNA to $1000
https://www.youtube.com/watch?v=9Hbe9ydG1Mg

Shrimpy Academy, What is Terra (LUNA)? Terra DeFi Blockchain Explained https://academy.shrimpy.io/post/what-is-terra-luna-terra-defi-blockchain-explained

Techcrunch, Crypto investors like Terraform Labs so much, they’re committing $150 million to its ‘ecosystem’
https://techcrunch.com/2021/07/16/crypto-investors-like-terraform-labs-so-much-theyre-committing-150-million-to-its-ecosystem/

Terra Docs: https://docs.terra.money/Concepts/Terra.html

Terra Website: https://www.terra.money/

Terra Whitepaper: https://www.terra.money/static/Terra_White_Paper.pdf

Twitter thread: Luna’s Tokenomics https://twitter.com/floodcapital/status/1386747714214445057?s=21