Is Terra’s LUNA the Best Cryptocurrency?

Adam Johnson

That would be a tall order to prove. But proponents of Terra may want to make that case.

Is Terra’s LUNA the Best Cryptocurrency? What is Terra?

Terra’s LUNA is a leading blockchain project that was started by a group of South Korean software developers. Their goal was to use the inspiration of Bitcoin to build a new form of money that is simple to use and safe.

Today, Terra is known mostly for its algorithmically adjusted stablecoins. A stablecoin is a cryptocurrency that is backed by another stable asset like the U.S. dollar. Stablecoins have emerged as an important component of cryptocurrency. Importantly, stablecoins bridge the gap between fiat and digital currencies. However, unlike Tether and USD Coins, Terra’s stablecoins are affected by market forces of supply and demand. TerraUSD is also known as UST.

Is Terra’s LUNA the Best Cryptocurrency? It has been Growing

Terra, whose native token LUNA has hit a series of all-time highs in April, is one of the first blockchain platforms supporting purely algorithmic stablecoins for e-commerce. In addition, Terra supports UST, which has become the third largest stablecoin by market capitalization and by popularity.

UST is aimed at reducing volatility associated with cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH). UST is not backed by the U.S. dollar, but instead backed by smart contract algorithms and the LUNA token.

Furthermore, Terra has also become the largest buyer of Convex’s CVX token over the past 30 days with more than $17 million in purchases. Convex is a protocol that allows users to earn fees without locking their contingent value right (CVR). The fees earned on Terra’s deposits are distributed among Terra users.

Lastly, Terra plans to hoard $10 billion worth of Bitcoin (BTC) to become the second-largest holder of the king crypto on the planet.

Is Terra’s LUNA the Best Cryptocurrency? Here is How Terra Works

LUNA is important to the protocol’s collateralizing mechanism to ensure the price stability of Terra’s algorithmic stablecoins. The value of UST should always be equivalent to the value of 1 U.S. dollar. Therefore, when UST drops below $1, LUNA is used to supplement the UST supply to ensure it keeps the value of the U.S. dollar. Due to this, LUNA experiences dynamic supply changes to support Terra’s collateralizing ecosystem.

For example, if an investor wants to mint UST, he or she must burn the dollar equivalent of LUNA. Burning LUNA results in decreased supply and increased demand resulting in a higher price.

Is Terra’s LUNA the Best Cryptocurrency? Reasons to Invest in Terra

The success of UST and LUNA in the marketplace has attracted more developers to the ecosystem. In the cryptoworld, Terra is one of the fastest-growing ecosystems with more than 100 projects forecast to be launched in 2022. The sheer number of native projects being built on Terra and its ability to attract large amounts of capital at this early stage is proof of the ecosystem’s quality.

Terra uses the Cosmos Tendermint consensus mechanism to achieve high transactions per second (TPS), while maintaining relatively low fees. It is projected that the platform can handle up to 10,000 TPS with transactions costing less than a dollar. In comparison, Ethereum still handles approximately less than 15 TPS with transactions costing as much as $9.

Anchor Protocol is the biggest DeFi platform built using Terra’s technology. It was designed to be the benchmark for stable coin yield, similar to traditional banking deposits but with higher annual percentage yield (APY). The protocol provides investors with an accessible, attractive, stable and risk-off savings tool. The Anchor Protocol has led to increased demand for UST due to the high yields associated with savings on the stablecoin.

Terra has become the second-largest platform for DeFi developers after Ethereum. If the trend continues, there is a likelihood that it will pass Ethereum in the coming years.

Generally, as the adoption of Terra’s stablecoins, especially UST, increases and with the rising transaction volumes by protocols being developed in the Terra ecosystem, UST’s demand increases. Consequently, LUNA’s fundamental value will increase.

Is Terra’s LUNA the Best Cryptocurrency? Concerns and Risks Best Be Weighed

Terra has been criticized for being less decentralized compared to other networks. Terra’s top 10 network validators hold about 40% of the delegated LUNA supply and 57% of UST.

Additionally, LUNA’s price is tightly tied to its demand for UST. Even though this is one of Terra’s strengths, it can also be its greatest weakness. During periods of high volatility or flash market crashes, UST may be unable to maintain its peg to the U.S. dollar.

Furthermore, it is not easy to tell whether Terra is growing in the world of e-commerce as the firm only focuses on UST usage in DeFi now. As an investor, it would be good to know how many people are actually using UST to pay for goods and services. At the moment, Terra seems to be growing only for DeFi and not the original exciting version of using it for payments in the real world.

Lastly, algorithmic stablecoins are considered a very controversial category of stablecoins that can be susceptible to price volatility. Terra’s stablecoins are secured by smart contract algorithms, financial engineering and market incentives of independent participants. These have proved to be unreliable in the time of crisis. An example of this is Irson Finance’s (IRON) algorithmic stablecoin, which lost over $1 billion in market cap in a single day due to poor tokenomics.

Conclusion

Terra was developed with an aim of offering low-cost payments and transactions for online vendors and their customers. Its protocols and native LUNA token present an interesting opportunity for investors to be exposed to both the emerging Layer-1 blockchain and the growth of algorithmic stablecoins.

The rate at which applications like Anchor Protocol are being developed and the growing need for decentralized currency places UST at the forefront of preferred, decentralized stablecoins in the crypto economy. Terra’s strong focus on DeFi and payment applications provides a strong foundation for future growth from crypto and the general public alike. With more applications expected to launch in 2022, it is sufficient to say that only the tip of the proverbial iceberg currently can be seen.

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