Thread by @0xGregH

Terra ($LUNA) Deep Dive Analysis and Long Term Performance

This is a condensed twitter thread of my full essay altcoinevolution.substack.com/p/terra-luna-d…

Video version:

TL;DR below in 3️⃣ tweets, full🧵 in 75 tweets

i) 2021 was a breakout year for many alt L1s, none more so than Terra which blasted it’s way to second position in Total Value Locked (TVL) of any chain and it’s stable coin UST flipped DAI to take the number 4 spot.

ii) If anything this trend is accelerating in the beginning of this year (recent events excluded) so Terra is definitely something we should be looking at.

iii) So to give you a headstart, we’ll go deep on Terra, covering: Protocol design, the problems it tackles, the investors, Tokenomics, consensus, developer experience, user/ecosystem growth and the team and future governance

1/75 Part 1: Protocol

Terra is a smart contract enabled blockchain that has stablecoin functionality natively built into the ecosystem.

The protocol consists of two main tokens, Terra (Stablecoins) and Luna (absorbs the price volatility of Terra & Utility)

2/75 Terra aims to bring crypto to the masses, provide a decentralised alternative to existing stablecoin offerings and create an interoperable open payments stack ready for a multichain future.

3/75 UST works in the following way: when UST’s market cap increases, the circulating supply of LUNA decreases. Increasing volume in UST creates value for LUNA holders.

4/75 Part 2: Investors & Tokenomics

Terraform Labs held the following token sales:
1. Pre-seed May 2018: 10 cents per Luna, $10M raised, number of tokens is unknown

5/75 2.Seed-sale Oct 2018: 16 cents per Luna, sold ~192M tokens, lockup 10 - 18 months, with 30% early liquidity.
3. Private-sale: 80 cents per Luna, sold ~18M tokens. Lockup 3 months, with 6 months linear vest thereafter.

6/75 Representing 26% of the initial genesis block, those allocations today would be up a grand total of approx. 380x from seed and 76x from the private sale today… not bad really…

7/75 The remaining allocation was split as so:

8/75 Terra is a driven by 4 mechanisms that affect the token price:
1. Staking to validate blocks on the network
2. Staking to provide price feeds
3. Keeping stablecoins stable
4. Transaction fees

See diagrams and more here: medium.com/bankless-dao/t…

9/75 Details on staking rewards and risk factors can be found here: ttps://medium.com/chorus-one/risks-and-rewards-when-staking-luna-on-the-terra-network-d66d703630a7

10/75 The return on staking is currently calculated to be 10.26% per year (terra.stake.id)

Before staking it is worth noting that there is a long 21 day unbonding period (the length of time it takes to de-stake your tokens until you can use them again).

11/75 The network has many stablecoins pegged to different fiat currencies. These stablecoins can be used to make payments.

As stated above Luna is burned when a stablecoin e.g. UST is minted and vice versa and represents the main driver of demand/supply in the ecosystem.

12/75 This has the effect of reducing the supply of Luna driving the price higher. So far the ecosystem has been in expansion mode with the UST supply growing rapidly.

13/75 One question that follows this is what happens when the demand for UST is lower? Well the UST/Luna mechanism has proven to be quite resilient, even in periods of mass volatility

https://twitter.com/cryptomanran/status/1484924896362696706

14/75 In addition it seems that Terra have capital controls in place to ensure the rate of withdrawal isn’t too severe as per @0xHamz

https://twitter.com/0xHamz/status/1486392840695554049

15/75 With lots of demand for stablecoins to protect peoples tendies in when a market trends down, the following stats from @alpha_pls show why Luna could be a hedge against a bear market:

https://twitter.com/alpha_pls/status/1487008782358089731?s=20

16/75 However, in Dec 2020 we saw a UST low of $0.7929 (-25.52%).

Plus UST could still succumb to a bank run effect as outlined here:

https://twitter.com/aklamun/status/1396615719228424196?s=20

17/75 This post caused a fair amount of discussion within the community eventually leading to this from Do Kwon. A bank run seems unlikely given these updates

https://twitter.com/stablekwon/status/1462063962506338318?s=20

18/75 Terra currently has a transaction fee of ~0.6%, which are given to validators as a reward, on stable coin payments. With industry standards around 2% for credit card processing at the point of sale it is easy to see why Terra’s payment offering is enticing.

19/75 Changes to Tokenomics: Columbus 5 Upgrade
In Columbus-4 a portion of all LUNA burned to issue UST was redirected to LUNA stakers, as well as a community pool to fund general ecosystem initiatives, Columbus-5 saw this redirect removed and replaced with a burn mechanism.

20/75 The reasoning behind this is two fold:
- The emergence of Terraform Capital and the $150 million Ecosystem Fund, has reduced the need for community funded projects.
- The change puts more deflationary pressure on LUNA much like Ethereum’s EIP-1559 upgrade.

21/75 It also laid the groundwork for more interoperability launching wormhole compatibility and setting the scene for Cosmos IBC support all of which I will go into more detail on further down.

22/75 Part 3: Consensus / Validators
Terra relies on a Tendermint (a byzantine fault tolerant algorithm) derived Delegated Proof of Stake (DPoS) system to secure the network.

23/75 In a Delegated Proof-of-Stake (DPoS) system, participants still stake coins but rather than individually validating blocks, it falls to groups, which are then responsible for reaching consensus between themselves.

For more here is a good article: blockchain.intellectsoft.net/blog/consensus…

24/75 This set up has two advantages: 1. Speed 2. Scalability.

The underlying Terra blockchain technology allows up to 10,000 transactions per second (TPS).

Do Kwon stated that the network currently handles up to a 1000 TPS with an average block time of about 6s.

25/75 TPS is always a tricky one to measure as @j0hnwang shows below.

https://twitter.com/j0hnwang/status/1481701356943650820

Another measure of speed is time-to-finality (TTF). As Tendermint is a Byzantine Fault Tolerant algorithms it is near instant finality.

26/75 Generally DPoS = more centralisation

The Nakamoto Coefficient represents the number of validators (nodes) that would have to collude together to successfully slow down or block any respective blockchain from functioning properly.

Here are some values for the top chains

27/75 With 130 active validators, and the top one @allnodes only having 0.47% of voting power the level of voting decentralisation is ok.
station.terra.money/stake

28/75 Compared to other platforms this is more concentrated (due in part to the smaller number of validators) lukeharriman02.medium.com/luna-delegatio…

29/75 Over time this list is expected to increase to 300 validators which will help to counteract some of the disadvantages, however relative to where AVAX and SOL are now that still seems small.

30/75 Part 4: Developer Experience

Terra has a maturing developer ecosystem with extensive documentation, tooling and grant programs to foster innovations on the chain.

31/75 @mariogabriele took a look at the number of individual contributors and code commits over the past year.

The trend is good however they note that Solana boats 7.5x the number of code commits in the same time.

readthegeneralist.com/briefing/terra

32/75 Enter the newly created Luna Foundation Guard (LFG) which will guide DX and education within the ecosystem.

TFL are donating ~$4b to this new initiative which makes other ecosystem funds look like spare change 🤣

https://twitter.com/stablekwon/status/1483973124765122561?s=20

33/75 In addition to the LFG program, Terra benefits from deep ties to three funds:

TFL which raised $150m to help nurture the ecosystem

++ $50-million fund by Chiron Partners

+++ Delphi Labs (@Delphi_Digital) has invested heavily into many projects.

https://twitter.com/Josephliow/status/1413667842185179139?s=20

34/75 In short the Terra ecosystem has a huge amount of resources and know-how to take teams from 0 to 1 quickly and effectively.

35/75 Part 5: User Experience & Usage

The user experience within Terra is improving daily with a wide variety of applications to choose from, as shown by this ecosystem list:

1. DEX - @terraswap_io @astroport_fi @loop_finance

36/75 2. Lending & Borrowing - @anchor_protocol, @mars_protocol, @orion_money

3. Launchpad - @StarTerra_io, @pylon_protocol

4. Investment - @mirror_protocol, @prism_protocol, @Levana_protocol

5. Insurance - @NexusMutual

6. Wallet - #TerraStation, @Mirror_Wallet

37/xx 7. Bridge - @wormholecrypto, @cosmosibc

8. Payments - @alice_finance, @kashdefi

9. NFTs marketplace - @knowhere_art

10. Community - @TerraLUNADaily, @Terrians_

11. Analytics Tool - @flipsidecrypto, @LunarCRUSH, @DefiLlama

38/75 Much longer lists:

https://mobile.twitter.com/eeyernlee/status/1486846745547980803

https://twitter.com/TerraLUNADaily/status/1481551828282408965

39/75 I did a full deep dive into many projects here if you want to go deeper on some of the stand out projects:

https://twitter.com/0xGregH/status/1484455385998102528

40/75 dApp Highlight: Anchor Protocol

One dApp of particular importance to the ecosystem is Anchor Protocol. It forms one of the three crucial “money lego” pillars Terra is built on as per readthegeneralist.com/briefing/terra

41/75 Anchor is smashing it in terms of bringing users to Luna

https://twitter.com/0xGregH/status/1484455403828101121?s=20&t=y87KcdiGQGqemIVrkFRBJQ

42/75 Recently however it has had some issues with it’s reserves as depositors have piled in, but borrowers haven’t increased at the same time to provide funding for the yields.

https://twitter.com/jarzoombek/status/1486698407561510919

43/75 An alternative view is here

https://twitter.com/YieldLabs/status/1486748270646997007?s=20

44/75 The TL;DR from the above is not to worry.

A cash infusion from TFL will likely solve the immediate issue, and mainatin the high interest rates people are receiving.

In the long run falling rates will help Anchor to become more sustainable.

45/75 Ecosystem Usage Statistics: UST growth is key to the ecosystem, so Terra’s success will largely depend on the adoption of UST as a standard stablecoin. Luckily we have some data that shows how well they are doing, firstly UST supply: @leaderweb

46/75 As we can see the growth in UST has been exponential since November time. The result of which is the UST flipped DAI as 4th largest stablecoin:

https://twitter.com/Huobi_Research/status/1472449614116790274

47/75 How will this look in the future... I dug out a couple of predictions, first Delphi Digitals data:

https://twitter.com/FloodCapital/status/1474098166031077379?s=20

48/75 To give a longer term view:

Our projections show there will be $177B in new Terra stablecoins by the end of 2025... there will be enormous buying pressure [on Luna] as the demand for Terra’s stablecoins increases.

Source: @DavidRakusan of @RBF_cap

49/75 It’s interesting to note that $177b new UST issued would overtake the current marketcaps for both USDC and USDT combined…

50/75 2021 saw Terra take second position in Total Value Locked (TVL) - a widely accepted proxy for usage, second only to Ethereum (which still dominates with 60% market share). defillama.com/chains

51/xx Ethereum losing market share isn't a good look as JPM stated

bnnbloomberg.ca/ethereum-s-dom…

52/75 Onchain data analysis

Terra has healthy onchain data with around 0.5m daily transactions, 200k active addresses, 150 active dapps and a reasonable amount of development activity.

53/xx While not the top of the list across the board, the fact that it has rapidly taken the number 4 spot for DeFi TVL will no doubt draw more interest from developers and teams looking for L1’s to build on.

From @Huobi_Research's 2022 report

54/75 Future Growth - Due to Terra’s foundation on the Cosmos blockchain there is a large unlock waiting to happen for this ecosystem.

While Terra currently sits in 5th UST and LUNA have a combined liquidity of nearly $200m on Osmosis (the gateway to Cosmos ecosystem).

55/75 Terra’s importance to Cosmos can be highlighted when looking at volume via Osmosis in which the combined 24h amounts are second only to the Osmosis token itself.

As Cosmos, via it’s IBC, opens up new assets we are likely to see even greater demand for the Terra tokens.

56/75 In addition to the IBC integration in Oct 21 we also saw Wormhole compatibility enabling Terra-native assets like UST and LUNA to be transferred to Solana, Ethereum, and Binance Smart Chain through one interface.

57/75 More details on the impact of the Columbus 5 upgrades to interoperability can be found in this excellent thread by @WilsonWithiam

https://twitter.com/WilsonWithiam/status/1443440070132895747?s=20

58/75 Part 6: Team and future governance
Terraform Labs is a South Korean-based company established by Do Kwon & Daniel Shin in 2018.

The company had a $32 million from crypto-giants such as @Binance, @ArringtonXRPcap and @PolychainCap

59/75 Governance
The Terra protocol is governed by community members. Community members and validators submit, vote, and implement proposals.

There are 5 potential proposal types. You can read more: docs.terra.money/docs/learn/ter…

https://twitter.com/stablekwon/status/1425383194648449032?s=20&t=BZQoKK1aU4tS3hUuYG_COA

60/75 This brings us to the end of our analysis part now we put it all together for the Bear and the Bull Cases for Terra ($Luna).

61/75 🐂 Bull Case
UST becomes number one stablecoin either due to the collapse of centralised alternatives, demand from the ecosystem e.g. IBC and Wormhole open up massive inflows capital and assets, eclipsing USDT/USDC combined, or explosive growth in dApps

62/75 With everything now swapping in and out of UST primarily. These events cause a mass burning of Luna driving the price to the moon.

63/75 🐻 case / headwinds:

The main risk to any algorithmic stablecoin is the failure to keep it’s peg. While UST held up well in this last drop, will it hold up in a massive fall? Modelling by TFL says no, but we shall see

64/75 Further to the previous point Terra’s stability mechanism works well when Terra’s economy is expanding – however, it remains to be seen how the whole system behaves during contractionary. So far we only have modelling, but real-world data hasn’t been collected.

65/75 The other elephant in the room is regulation… Terraform Labs is currently in a battle with the SEC over Mirror Protocol.

To counter this TFL isn’t a US company so the SEC is limited in it’s options, plus Terra has already counter sued. Time will tell on this one.

66/xx A lot of the current growth can be placed in part to the high yields offered by Anchor. As rates fall (especially with the issues around Anchor’s yield reserves) will users still be attracted to the protocol?

67/75 Competition is fierce and comes in a few forms:

Battling to reduce Ethereums market share will be hard and Terra has significant ground to cover to catch up with leading DeFi chains

68/75 The same goes for catching up and eclipsing Tether’s USDT, currently the most popular stablecoin.

69/75 Also there are businesses risks around the dApps, Chai for example could still become irrelevant as bigger players integrate crypto rails and reduce fees.

70/75 Finally, decentralization may play a role as Terra is less decentralized than other networks with only 130 validators.

71/75 Overall, Terra ($LUNA) has one of the most promising ecosystems I have seen, with strong backers, tokenomics that lend itself to resilience.

72/75 As a bonus here are some Terra legends to follow:
@alpha_pls
@stablekwon
@milesdeutscher
@Route2FI
@cryptomanran

73/75 ...cont
@eeyernlee
@cryptoharry_
@cptn3m0x
@cephii1
@themoonmidas
@josephilow
@lejimmy
@jayjaboneta
@nicolasflamelx
@jwang815
@alphaseeker21
@archon_0x
@danku_r
@petertheterran
@sjpark_TFL
@caleb_twt_
@terrayoda

74/75 ...cont
@fynntothemoon
@fishmarketacad
@cy_coleman
@lunaterraluna
@shigeo808
@speicherx
@gabrielgfoo
@theryanlion
@rebel_defi
@drcle4n
@wolf_of_defi
@shivsakhuja
@panterra0x
@CCrush89
@0xCha0s
@invaderbaku

75/75 So there we have it. As always DYOR this is not investment advice, also I might have missed stuff that is a key technology thing that you may understand better than I do.

If you liked this content, please give us a share and tag me!

Subscribe for more below: altcoinevolution.substack.com/terra-luna-dee…

Watch the video version here:

You can read the unrolled version of this thread here:
typefully.com/u/0xGregH/t/5U…

More info on this situation here by @danku_r

https://twitter.com/danku_r/status/1488279593203257350?s=20

Retweet the whole thread here:

https://twitter.com/0xGregH/status/1488449677238300673?s=20