• After Ethereum, Terra is now the preferred network for DeFi

  • Terra, the rapidly expanding DeFi toolkit built on Cosmos, is now officially the second-largest decentralized finance ecosystem.

    According to DeFi Llama statistics, Terra presently has a total value locked (TVL) of just over $23 billion, an all-time high in US dollar terms.

    This is approximately twice the amount of BNB Chain (previously Binance Smart Chain) and Fantom, the runners-up. Ethereum, the royal chain, still controls 54% of the whole DeFi market, commanding $111 billion.

    However, when we convert TVL to LUNA, the Terra network’s native token used to pay transaction fees and vote on governance, the picture changes slightly.

    Instead, the latest surge appears to be a modest blip in comparison to activity last summer.

    This shows that, in addition to an increase in actual activity (people pouring crypto into the network to perform exciting DeFi things), the primary driver of the network has been the skyrocketing price of LUNA.

    According to CoinGecko, LUNA has increased by roughly 38.8 percent in the last week. During the same time frame, the native token powering Terra’s main DeFi project, Anchor Protocol (ANC), increased by more than 70%. Anchor is a money market similar to Ethereum’s Aave, where users can earn up to 19.49% on their UST (Terra’s algorithmic, USD-pegged stablecoin).

    As a result, there’s a lot of price activity boosting the Terra ecology. The reasons for the recent increase are numerous. The LUNA token, for example, very recently begun trading on FTX Exchange.

    More importantly, the protocol set aside $1 billion for a Bitcoin treasury, which was raised through a LUNA token sale. Jump Crypto and Three Arrows Capital spearheaded the February 23 offering, with the cash purportedly being used to construct a “UST Forex Reserve.”

    The concept is that the Luna Foundation Guard (LFG), a nonprofit organization dedicated to Terra, will be able to supply the stablecoin with a non-correlated reserve in the event of violent price movements. This will assist to keep UST at $1.

    Given the architecture of UST and LUNA, the fact that this reserve is in a non-correlated reserve is significant. Every time one unit of UST is made, one unit of LUNA is destroyed. The opposite is also true—every time LUNA is generated, UST is destroyed.

    This opens up an intriguing arbitrage opportunity. If UST falls below $1, customers can still purchase it and then exchange it for $1 of LUNA to recoup the savings. As this UST is purchased and swapped, it gets burned and removed from circulation. This reduces the stablecoin’s supply and helps to restore its value to $1.

    In contrast, when more LUNA is destroyed to issue UST, the circulating quantity of LUNA drops, causing the token’s price to rise similarly.

    As you can see, these two items have a fairly precise supply-and-demand connection. By inserting an unrelated asset such as Bitcoin into the equation, the LFG is arming itself in case the preceding process fails to keep the UST pegged for whatever reason.

    And, since UST’s market worth grows by the week, the $1 billion figure makes a lot of sense. A substantial reserve is required to stabilize a project with a market worth of more than $13 billion.

    Another benefit of utilizing Bitcoin as a reserve currency for the Terra ecosystem is that it is censorship-resistant and decentralized, as opposed to, say, the USDC stablecoin that underpins the algorithmic stablecoin DAI.

    It’s a one-of-a-kind move from a one-of-a-kind project. However, the market will never know until Terra and its stablecoin are actually tested via a black swan event similar to what occurred in March 2020.

    For the time being, so-called Lunatics remain enamored with LUNA and the DeFi initiatives that are being developed under its auspices.

    And, while it is still a long way from catching Ethereum, the fact that it has separated itself from the rest of the group implies that Terra is more than a passing fad.

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