What do you think of when you hear the word “ecosystem?” Most people think of nature - maybe a jungle that contains plants, fungi, snakes, small mammals, birds, bacteria, and everything that requires a whole system to function on its own. All these organisms use each other to survive in different ways. They are interdependent and rely on each other. That’s what makes an ecosystem work.
So if you heard the word “financial ecosystem?” The idea is the same - it’s a collection of different people, organizations, processes, and systems that let us buy and sell things, use money, save it, invest it, and everything else related to finance.
Let’s take it a step further - what about the phrase “crypto financial ecosystem?” This is a whole other arena. The crypto world may have some isolated individual projects, but what it really needs is an ecosystem.
Welcome to whiteboard crypto, the #1 Youtube channel for crypto education and here we explain topics of the cryptocurrency world using analogies, stories, and examples so you can easily understand them. In this video we are going to explain what the Terra ecosystem is, how it’s currently a working algorithmic stable, what that means... and what opportunities lie waiting for you to take advantage of.
So what actually is the Terra blockchain? In simple crypto terms, Terra is a proof of stake blockchain intended to maximize the potential of the advantages of crypto for the financial world, focusing on both on mass payment processing, as well as the creation of a useful stablecoin.
Terra’s Payment Processing
Terra is an ecosystem of many different things and has many uses, but the main use case is in payment processing and in their stablecoins.
Let me explain the payment processing really quick, then we’ll get onto the cool part: the algorithmic stablecoin. Visa, Mastercard, or American Express… they aren’t working for nothing. They actually take about 2-3% of every transaction in fees that merchants pay to the credit card company. That doesn’t sound like a lot, but if everybody comes in to a gas station and buys one bag of flaming hot Cheetos for 2 bucks, those fees cut in to the store’s sales significantly. Speaking of fees, we are currently charging a 0% fee for dropping a like on this button, just a little reminder that helps the youtube algorithm share our videos with more people and spread the knowledge of cryptocurrency ideas.
The key here is that Terra caps fees at 1%. And that’s just the cap. In fact, fees are usually much, much lower than 1%! You can see the benefit of merchants converting to this payment processing blockchain.
The Stablecoin part of Terra
Other than payment processing, Terra has other cool features that set it apart from other cryptos, and even from other financial processes and products.
Think about this question. Terra uses a blockchain, right? And Bitcoin uses a blockchain, right? So what’s the difference? Why would a merchant use Terra when they can use Bitcoin?
Here’s the thing - Bitcoin is volatile. The value of a Bitcoin measured in dollars changes constantly. This is important because we measure things in Dollars, the bag of candy, a car, your rent… everyone thinks in dollars. This volatility problem inspired something called stablecoins. We have a few videos on stablecoins if you’re interested in learning more.
The idea here is pretty simple, Stablecoins are pegged to fiat currencies.
So if people have their wealth measured in these fiat currencies, and use them most consistently, they don’t want to use something like Bitcoin which could change value. Nobody wants to be that guy who spent 10,000 bitcoins on some pizza. At the time it was really only $20 worth. If they spend it, there’s a chance it could go up, and if they accept it, there’s a chance it could go down.
The core idea here is we want a separate channel to make payments, and a separate channel to invest in an asset, we don’t want them to be the same thing. We want our money to have a stable value so we can expect that it will be worth the same thing tomorrow and the next day and the next year.
Terra solves this by using a stablecoin algorithm that allows certain tokens on the network to stay at a single price.
Terra has a stablecoin for several currencies like the US dollar (represented as UST) , the Korean Won (represented as KRT) and the euro (represented as EUT.) These are simply ways of using cryptocurrency to transact in simpler, faster, and cheaper ways than ever before. Consumers can still use their native currency like the Korean Won, and Terra does the rest of the work for them, converting everything and processing the payment.
Simply put, Terra is attempting to bring the advantages of crypto and DeFi and all those decentralized applications, but without the volatility and unpredictability.
What about the Titan Crash?
I know what you’re thinking, at least if you’ve watched our other videos. “Algorithmic stablecoins never work!” Well, so far, it has worked. The recent Titan and Iron algorithmic stablecoin crashed because there was no reason to hold or use either of those coins… you only used them to make more of the coins… and this was essentially a ponzi scheme in the crypto world.
Terra is different because they created stablecoins with a purpose… in fact Terra is built around an entire blockchain ecosystem for all the dApps and platforms to use, while Titan was simply a get-rich-quick yield farming opportunity that was pumped and dumped on someone else’s blockchain. Even Ethereum itself, where does it get it’s value? It’s from the ecosystem surrounding Ethereum, all the dApps and smart contracts and such, this is what the Terra stablecoins are banking on as well. We may be wrong, and Terra may crash in the future, but as far as the research we have done, this process has worked so far and they appear quite different from Titan. Let’s talk about how they are similar:
What is LUNA?
The Terra ecosystem holds two assets at its heart. The native network coin (LUNA) and the stablecoin (UST). The power of LUNA is a bit different than in other projects because it is used to maintain the stable value of Terra, but the idea is the same. LUNA is a token that is used to keep the price of Terra at exactly $1. Let me explain...
When the value of UST (the US dollar stablecoin of Terra) is mismatched to the value of a real US dollar, they use LUNA to incentivize people to do certain things to stabilize it, either by burning their UST or by creating more of it to manipulate the value.
If Terra is over a dollar, the answer is simple, you can always reduce the price of something by making more of it. That’s exactly what they do. Who do they give these Terra tokens to? Well, to people that trade in their Luna tokens for a very small, but important profit.
If Terra is under a dollar, you can trade in your Terra coins for a dollar value of Luna, making another very small, but important profit. This means we can basically shrink the circulating supply, causing the price to go up.
You might be wondering the same thing I was wondering “where does all this everlasting profit come from?” That is a great question!
The profit comes from money flowing into the ecosystem. As more and more people buy UST, Luna will grow in price, although a small portion of this profit will go to those who print UST to keep it stable. However, when people start taking their money out of the ecosystem… Luna will fall in price. So the value is taken from people who hold Luna. This brings us to another question “Why would you hold Luna?” You hold Luna for 2 reasons. 1) If you are bullish on the Terra ecosystem and think more people will come to it, and 2) if you want to perform transactions on the ecosystem, as the Luna is the native coin that allows you to do things.
This makes it different from the Titan Death Spiral, nobody had a reason to buy Titan or Iron. It’s because people can use the stablecoin for stuff all across the ecosystem. Speaking of that...
What can you do with Terra?
As we mentioned in the beginning, Terra is more of an ecosystem of many different crypto projects, with the goal of simplifying transactions by using stablecoins and using those stablecoins to allow the use of financial tools in a way that is easier for people to understand and think in dollars.
Terra has two big protocols called Anchor and Mirror. The Mirror protocol, which allows for the creation of what they call mAssets, basically representations of the actual assets, similar to exchange traded funds or ETFs on the stock exchanges. This means you can buy US stocks, or gold, or even European real estate no matter where you are in the world, without permission, and you can do it fractionally. This is a great overall idea, and it has been used for like 2 years now, but it uses something called synthetic assets, so some experts have an issue with it. This gets people to buy Luna and UST.
Anchor uses the staking mechanism of Terra to create what are basically savings accounts. You save your stablecoins like UST, and you earn a certain percentage rate of interest on your coins, just the way traditional savings accounts are supposed to work (if the Federal Reserve didn’t keep interest rates so low all the time.) This incentivizes people to keep their Terra on the ecosystem. This gets people to keep their UST on the ecosystem.
Personally, we like to follow this model. We create videos so you can find us, and then if you subscribe, we make sure to keep giving you high-quality explainer videos so you’ll stick around, just like Mirror and Anchor. So if you haven’t already, consider subscribing because it’s free, gives you notifications of our high-quality videos, and rewards our hard work creating these videos so quickly.
But again, that’s not all! Terra was created using the Cosmos blockchain. The name isn’t super important, but it means that Terra is built to be able to integrate with many other blockchains specifically for interoperability right from the foundation. Again, this emphasizes Terra’s focus on an entire ecosystem of DeFi products and services, and I could create a whole other video on this.
What’s next for Terra?
From the beginning, this was a very ambitious project, but it’s in good hands and has a lot of potential room to grow. Terra was created by Daniel Shin and Do Kwon, graduates of the University of Pennsylvania and Stanford respectively, who are each successful in their own right prior to creating Terra.
Right now, Terra is targeting payment processing, specifically in a few Asian countries like South Korea and Taiwan, and it has been successful, saving merchants an average of 1.5% on transactions with a payment processor that uses Terra called CHAI that is growing rapidly among consumers, eclipsing Bitcoin Cash and even rivaling Litecoin as of 2019.
As a whole ecosystem, it’s possible Terra could go in many different directions, but they are currently targeting something similar to an incubator model. They would like to further invest in different use cases of Terra like dApps which could significantly increase user growth. Whichever direction it takes, Terra is certainly one to keep an eye on.
We hope you enjoyed this video, we really hope you learned something, and most of all… we hope to see you in our next video!