1) Always good to have healthy skepticism, but let’s be reminded of the key distinction between Terra stables and $IRON. Why is it unlikely for $LUNA to get rekt in the same death spiral fashion as $TITAN? 👇
2) Do Kwon said it best. Algo stables have often relied on recursive holding incentives, i.e., the stablecoin’s main use case is to farm more of itself.
3) Terra’s ambition is to build a diversified economy with uncorrelated use cases and revenue streams.
This is why it was absolutely critical that they bootstrapped their user-base with CHAI payments in Korea - still seeing consistent usage and growth
4) These users don’t care nor are aware about what’s going on in the world of DeFi. They’re using Terra stables because they are useful to them
And the fees they pay flow to stakers, establishing a LUNA price floor as a yield-bearing asset. This is entirely uncorrelated to $UST
5) The Terra economy will always self correct as long as this price floor is maintained. If $UST is sold off en-masse during a market downturn, $LUNA will be minted and diluted due to reduced demand.
By design, LUNA stakers are absorbing the volatility of the Terra economy
6) And in the meantime, Terra has become more robust by offering de-peg insurance options while they build out their vision.
Eventually, de-peg insurance won’t be necessary, as the TeFi economy offers more sticky and diversified use cases, further hardening the peg.
2) In Terra’s case, money supply is adjusted based on real demand & smart contract logic - no guesswork required
Terra profits from the creation of money - arbitrageurs essentially purchase $UST from the protocol for the opportunity to make profit on the open market
3) The protocol incurs zero cost to issue Terra - this is why it’s wildly profitable.
Much like the Fed profits significantly from the expansion of its balance sheet, Terra profits from the expansion of its money supply
When evaluating DeFi fundamentals, “protocol revenue”aka fees that accrue directly to token holders, has become a popular metric - Token Terminal tracks this
2) You’ll notice that LUNA is completely omitted from that chart. They are not including fees to LUNA stakers even though these accrue to token holders.
They do track these fees with their “Total revenue” metric. However, this also doesn’t tell the whole picture…
3) You might look at the table below and think that Terra is fairly expensive with a Price to Sales ratio = 492x
But this doesn’t account for the most lucrative form of Terra’s value capture - the earnings it recaptures from creating stablecoins, aka seigniorage