The cyclical nature of cryptocurrency ensures a steady need for stable assets. Stablecoins make up the majority of this market – and the recent boom cycle brought success to several new offerings. TerraUSD and the associated LUNA token exploded exponentially, with the LUNA governance token’s price reaching 25 times its earlier value. In part, this is due to a growing industry hunger for decentralized finance options. Terra offers a variety of financial vehicles that work through their system, something that allowed them to attract a vast new audience.
Decentralized Finance, or DeFi, served as the rallying cry for this boom cycle. Investors are no longer content to leverage volatility in the market, instead seeking stable – if reduced – profits through savings, yield farming and liquidity pools. This move towards longer-term profitability suggests a maturing market, with Terra and Luna benefiting from the change.
What Makes Terra Different?
The original spread of stablecoins operated on a simple premise. The issuing entity held a supply of fiat in trust equal to the amount of stablecoin issued. While this works, to a degree, it suffers from significant potential scalability issues as time goes on. TerraUSD and similar algorithmic stablecoins peg their value through the use of a carefully designed balancing system. Stability comes through the sale and burning of the LUNA governance token.
When the supply of Terra stablecoins is high, so too is the price of LUNA. When the supply shrinks, LUNA’s price follows. This keeps the stablecoins – which include both TerraUSD and TerraKRW – at the correct price.
Terra’s Mirror and Anchor Protocols
To incentive the use of Terra over other algorithmic stablecoins, Terraform Labs created a pair of opposing protocols.The Mirror Protocol offers users with a means to digitize their real world assets, bringing assets such as stocks and commodities into the blockchain world. In contrast, the Anchor protocol operates as a cryptocurrency savings account. It creates exposure to proof-of-staking opportunities and lower risk.
When the market is high, users will naturally gravitate towards Mirror to take advantage of that fact. When the market dips, they should gravitate towards the safer investment represented by Anchor. In this way, Terra provides more than just a stablecoin – it provides an entire investment ecosystem for its users.