As advanced as the crypto crowd would like to be, we’re still a very tribal group. A quick scroll through Twitter will show tons of users who live and breathe based on the success of their chosen ecosystem. Fans of SOL, FTM power users, BTC maximalists, ETH loyalists, everyone has a horse in the race.
Ecosystems result in synergies between the apps built on them. As a result, interoperability is an assumption, rather than a feature. This is why it’s so important to choose an ecosystem, dive deep in it, and really build an understanding of how all the pieces fit together. In my case, the Terra ecosystem seems like the answer to so many of the problems plaguing the rest of the crypto world.
Making Stablecoins Work
The best example of this is UST and its integral role in the Terra ecosystem.
As Terra’s USD-pegged stablecoin, UST solves a lot of the big problems around stablecoins. USDT, USDC, and DAI may be the most well-known stablecoins, but there is plenty of room to disrupt based on their weaknesses (fraud risk, censorship risk, and smart contract risk, respectively).
The need is there for new stablecoins that can scale effectively without creating massive risks. Just look at current market capitalizations for MIM ($2.8B), FRAX ($2.7B), and UST $12.5B).
UST is backed by the value of LUNA, which could be considered “ponzinomics”, but is also the same fractional reserve banking that the USD runs on.
Without getting too deep into it, a backed stablecoin maintains its peg to the dollar by allowing users to mint or redeem based on discrepancies (i.e. USDT drops too low, user buys it and redeems for a small profit). UST, on the other hand, is a hybrid collateralized debt position / algorithmic stablecoin.
This means that 1 UST can always be redeemed for $1 of LUNA (and $1 worth of LUNA burned to mint 1 UST). So when the price of UST rises or falls, an interested arbitrageur burns LUNA or UST accordingly.
UST isn’t backed by money in a vault and assets can’t be seized by a central authority, but that still means that it can fall to smart contract risk, or just plain bad design. The upward pressure this creates on LUNA’s price is similar to if every USDC being bought on ETH resulted in that ETH being burned.
UST Shines as a Medium of Transfer
We think that the Terra ecosystem is going to be the best place to spend or save money. A common rebuke against Bitcoin is “no one wants to pay for their Starbucks with Bitcoin”, largely due to the fees and volatility. Stablecoins solve this problem and have a ton of potential to be the golden solution here.
For a long time, we’ve heard about how the Lightning Network or other solutions would make Bitcoin “work” as a medium of transfer. But what if volatile assets are not what people want?
Maybe there will be a day where “1 BTC = 1 BTC” and vendors and spenders alike don’t notice the volatility because they all measure their worth in BTC, but that isn’t going to be here anytime soon.
In the meantime, UST could be the stablecoin solution that makes mainstream crypto adoption work. It may be USD-pegged, but it is integrated with the Terra ecosystem, is uncensorable, and self-custodied.
UST’s DeFi Promise
Everyone is trying to build their own bank. This is the DeFi promise, yet paying high gas fees in order to set up a yielding position on the ETH network is not accessible to many users.
When users do go to save, they are looking for banking solutions that make everything simpler and more profitable than what they’re used to.
DeFi on ETH is basically unusable for people of certain net worths, largely due to the PoW mechanism and the associated gas fees. Terra already has mastered the PoS model and therefore allows for quick transactions for low fees, without having to wait around for the promised land of ETH 2.0.
The other big problem is that DeFi on ETH is very vulnerable to failure from stablecoins. If USDC fails, that results in a lot of lost value for the ETH DeFi ecosystem. UST is decentralized and doesn’t have these same chokepoints.
UST is also now a top 20 coin (currently ranked #15) by market capitalization, and Anchor Protocol offers an impressive 19.35% return on UST for minimal risk.
Anchor Protocol is just one of many simple solutions for users to choose from. It’s a simple yet effective borrowing and lending protocol that offers a relatively stable 15-20% interest on stablecoins, as well as competitive lending rates.
Naysayers will often say there is significant hidden risk here, but Anchor Protocol is extremely transparent about the risks being taken. Borrowers put up staked tokens (such as bLUNA, stETH, or bSOL) to open a loan in UST. Lenders deposit their UST. Anchor collects the staking rewards and interest in order to cover the rate paid out to the depositor. $ANC tokens are also used to incentivize users.
Right now, Anchor has a TVL of $9.78B, which shows strong interest in this model of savings account. Obviously the rates will come down over time, but by that point, users will be much more comfortable with this model.
The fact that borrowers can avoid lockup on staked tokens while still participating in upside, makes Anchor protocol the perfect high yield savings account. Basically, Anchor is an appealing offer to both the jaded yield farmers and the exuberant noobies.
Conclusion
I imagine a world where I can be paid in UST, and use that UST to invest in other protocols or mirrored equity assets while still being able to take some of my portfolio and put it in Anchor as a savings account. At the same time, I can choose to take money out of the savings account and easily use it to buy things in UST.
These types of ideas and investments only make sense in a world where they hit key adoption levels. This is where Anchor’s fast-growing TVL comes from, as well as the many partnerships that are setting it apart from other “ETH disrupters”.
By having a built-in stablecoin, Terra becomes the perfect place to save and spend for all types of users. And with partnerships like Terra's $40 million deal with the Washington Nationals, customers will now be able to pay for things in the ballpark with UST.
I believe the future of crypto and payments won't be BTC’s Lightning Network, or Litecoin. It will be stablecoins. And Terra offers the perfect solution for this.