Understand the Terra ecosystem in five minutes: LUNA, Mirror, and Anchor

This article was published by Blockchain Study Society, authored by Brother Gu, with the original title "Understanding the Terra Ecosystem: LUNA Algorithmic Stablecoin, Mirror Synthetic Assets, Anchor Savings Protocol."

The stablecoin sector has vast potential, and the competition is exceptionally fierce, with numerous participants. Recently, algorithmic stablecoins have become a market hotspot, attracting significant attention. However, as market trends shift, fewer people are discussing algorithmic stablecoin projects, and many algorithmic stablecoins are currently in a de-pegged state.

Today, we will introduce Terra, which also belongs to the algorithmic stablecoin sector but is distinctly different from the recent popular algorithmic stablecoin projects. In one sentence, Terra resembles a regular army's approach, rather than a Ponzi scheme.

Currently, the Terra ecosystem has three main products: a stablecoin protocol based on LUNA, a synthetic asset trading platform called Mirror Protocol, and a yet-to-launch DeFi savings protocol called Anchor. This article will sequentially introduce these three products to provide users with a comprehensive understanding of the Terra ecosystem.

LUNA-Based Stablecoin

The company operating Terra is Terraform Labs, headquartered in Seoul, South Korea. The founding members of Terra have strong business backgrounds and resources, establishing a payment alliance called "Terra Alliance," which includes leading e-commerce, music media, hotel booking, and other platforms in South Korea. Members of the alliance can use Terra for payments or other business transactions.

Many companies in South Korea and surrounding countries currently support Terra's stablecoin payments. The use of Terra stablecoins is primarily facilitated through two payment tools: CHAI and Meme Pay. CHAI focuses on the South Korean market, while Meme Pay is a payment software integrated directly with banks in Mongolia. Among these, CHAI is the main product of the Terra stablecoin ecosystem, contributing the vast majority of transaction volume and user numbers.

As shown in the figure below, the latest data indicates that CHAI currently has a total user base of 2.2 million, with 65,000 daily active users and a daily transaction volume of 1.9 billion KRW, approximately 1.8 million USD.

From past data, CHAI's transaction volume exceeded 100 billion KRW in November 2020, equivalent to nearly 9 million USD.

From the above data, we can see that the development of Terra's stablecoin system in South Korea is commendable, which also indicates that the team possesses strong business resources and marketing capabilities.

Implementation Principle

After reviewing the development situation, let's take a closer look at the implementation principle of Terra's stablecoin.

Terra is a blockchain protocol built on the Cosmos framework, operating as a separate chain. On this chain, Terra has developed a stablecoin network, issuing various fiat-pegged stablecoins.

The stablecoins issued by Terra are algorithmic stablecoins, which do not have supporting assets like BTC, ETH, or USD behind them but are backed by Terra's system token, LUNA.

Currently, the most widely issued stablecoins by Terra are UST, KRT, SDT, and MNT, where UST is a USD stablecoin, KRT is a KRW stablecoin, SDT is an SDR (Special Drawing Rights of the International Monetary Fund) stablecoin, and MNT is a Mongolian Tugrik stablecoin.

The Terra system adjusts stablecoin prices through an arbitrage mechanism to maintain their peg, as illustrated below:

• When the price of 1 KRT < 1 KRW, miners send 1 KRT to the system and receive LUNA tokens equivalent to 1 KRW. At this point, the supply of KRT in the system decreases, and the price rises, gradually approaching the equivalent KRW;

• When the price of 1 KRT > 1 KRW, miners send LUNA tokens equivalent to 1 KRW to the system and receive 1 KRT. At this point, the supply of KRT in the system increases, and the price decreases, gradually approaching the equivalent KRW.

Miners are crucial within the Terra ecosystem; stablecoins are generated by miners staking the native token LUNA. Additionally, when prices become unpegged, miners must also bear short-term volatility risks to mint/burn corresponding tokens to stabilize prices.

While protecting network security, miners also play a role in stabilizing prices. Terra has designed deterministic rewards for miners to incentivize them to take risks for the normal operation of the network.

Every transaction that occurs within Terra will incur a fee of 0.1% to 1%, capped at 1 TerraSDR, and these fees will be distributed to users participating in staking. Rewards will increase with transaction volume.

Additionally, there is a seigniorage tax within Terra; when the demand for TERRA increases, the system will mint and sell TERRA to acquire LUNA. This is the seigniorage tax, and miners receive rewards based on their staking proportion while bearing risks. The system will burn a portion of the earned LUNA, making mining capacity scarcer. The remaining portion of the seigniorage tax will belong to the foundation to provide financial incentives.

We can see that Terra's stablecoin system is backed by LUNA, and when the price of LUNA fluctuates significantly, stablecoins may become unpegged, which is a point of skepticism regarding the Terra system in the market. However, as the number of users and transaction volume of Terra continues to grow, the user base will solidify, enhancing the Terra system's risk resistance.

Low governance participation is a challenge many projects aim to address, but observing Terra's proposals reveals that several proposals have received over 100 million votes, while the total staked amount in the system is 300 million, indicating substantial user participation in voting for each proposal.

Mirror Protocol

Mirror Protocol is a synthetic asset platform that allows users to mint and trade synthetic tokens for stocks, futures, exchange-traded funds, and other assets. Through Mirror Protocol, users can directly trade various leading global assets, and currently, 14 synthetic assets have been launched.

The minting of synthetic assets within Mirror is primarily conducted using UST, and during the minting process, users can also choose to mint using other existing synthetic assets. The minimum collateralization ratio for UST minting is 150%, while the minimum collateralization ratio for other synthetic assets is 200%.

Mirror has partnered with several DeFi protocols to expand the use of its synthetic assets, such as Injective, UniLend, and Mask. Injective will support synthetic assets from Mirror on its layer-two derivatives trading protocol; UniLend will allow the use of Mirror's synthetic assets as collateral for lending; and Mask will integrate Mirror's synthetic assets into Twitter. Mirror has a unique advantage in expanding the application of its synthetic assets.

Mirror has also recently completed a bridge to the Binance Smart Chain, bringing synthetic stock assets into the Binance community. Currently, synthetic tokens for stocks like Amazon and Google can be traded on the decentralized exchange PancakeSwap on Binance Smart Chain.

The tokens of Mirror are distributed through a fair launch, with a total issuance of 370,575,000 MIR tokens, which will be fully distributed over four years. At the genesis, Mirror Protocol issued 54.9 million tokens, with the following distribution ratios:

In the subsequent four years, MIR will be distributed at a fixed rate to investors and community users participating in liquidity mining on Terraswap or Uniswap. By the end of the fourth year, the final distribution ratios of MIR will be as follows:

• Airdrop 4.9%: allocated to UNI holders and LUNA stakeholders;

• LUNA staking rewards 4.9%: allocated to LUNA stakers in the first year of the protocol's launch;

• mAsset LP staking 45.1%: allocated to the mAsset staking pool over four years;

• MIR LP staking 10.4%: allocated to the MIR-UST staking pool over four years;

• Community pool 34.6%: allocated to the community reserve pool over four years.

In addition to being used for governance participation, when users burn minted synthetic assets to reclaim their collateral, a protocol fee of 1.5% will be charged, which will be distributed to MIR stakeholders. In terms of revenue, the official website indicates a 24-hour fee income of $51,000, which translates to a monthly fee income of approximately $1.5 million.

Mirror provides strong application scenarios for Terra's stablecoin while also increasing miner income. Additionally, a portion of its tokens is allocated to users who stake LUNA tokens, enhancing the income of Terra miners, which is crucial for the stability of the Terra system.

Anchor

Anchor is a new DeFi savings product that offers reliable interest rates for stablecoin deposits. Anchor is governed by the Interchain Asset Association, whose members include Terraform founder Do Kwon, Cosmos core developer Zaki Manian, and Web3 Foundation advisor Jack Platts. According to public reports, three companies plan to launch Anchor on their respective blockchains and will expand it to other PoS blockchains in the future.

Anchor has not yet launched, and according to previously announced information, it is significantly overdue. Here, we will briefly introduce what it aims to achieve and its principles based on publicly available information.

Anchor is a DeFi protocol that combines staking mechanisms, where the assets deposited will be used for staking, generating staking derivative tokens. While obtaining staking rewards, the derivative tokens are used to maintain asset liquidity.

Users' deposited assets will enjoy a share of staking rewards, allowing them to obtain reliable interest rates. Meanwhile, derivative tokens can be used as collateral for lending.

In simpler terms, Anchor can be understood as a liquidity release protocol for staking assets, similar to well-known protocols like Bifrost and Stafi, but with differences in supporting stablecoin deposits. Additionally, Anchor incorporates the functionality of using derivative assets as collateral for lending.

The intention of Anchor is to provide more application scenarios for Terra's stablecoin and LUNA, thereby enhancing its ecosystem.