Terra Stablecoins are on the rise
Since the Great Depression and the World Wars of the 20th Century the U.S. dollar has been the dominant currency worldwide. But there is no reason this will continue forever. Looking at the history of fiat currencies, every 100 years or so the world’s reserve currency has changed. The country that dominates global commerce during any given period is usually the one who’s currency dominates. This time around, the winner may not be a country. Instead, the table is being set for a currency that lives on a distributed blockchain called Terra to step in as the dollar’s hegemony weakens. And because this technology is permissionless, decentralized, self-governing, censorship resistant, and self-perpetuating it is unlikely that any government or central authority can stop it.
Arguing that the U.S.’s influence over global commerce is waning is nothing new. The US long ago lost the title of being the largest creditor nation in the world. Today it is not just the largest debtor nation in the world but the largest debtor nation in the history of the world. In contrast, the country many believe will succeed the U.S. in dominating global commerce, the People’s Republic of China, is not only approaching the U.S. in commercial scale and influence but it has become the largest creditor nation of all time. Will the 21st century belong to China and the Yuan?
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The prize for becoming the reserve currency of this future is substantial. Having the world’s reserve currency affords the U.S. many privileges. It means there is underlying demand for U.S. bonds from foreign central banks and other large investors looking for a safe market in which to invest. That allows the U.S. to borrow at lower rates than would otherwise be possible and it means people holding U.S. dollars have greater buying and borrowing power than anyone in the rest of the world.
Certainly, China’s extraordinary growth in the last few decades suggest it will be the next winner. But could cryptocurrencies steal China’s momentum? From where we stand today, they have a long way to go. The current crypto stablecoin market capitalization is a mere $141B . But the prize is enormous: if crypto becomes the dominant infrastructure for global payments, saving and investing, a significant portion of the world’s $86T of fiat money could move over to the blockchain.
Crypto stablecoins have become the “killer app” of blockchains, seemingly overnight. As the chart below on the Ethereum blockchain shows, it has only been in the last 18 months that this dominance has emerged.
The question then is whether there will be one coin to rule them all? Given Bitcoin’s fame and market size or Ethereum’s growing dominance in financial activity, one would think one of these two would be the natural place for the winner to arise. In fact, though, there is only one blockchain that has an audacious enough vision and the proof points of early momentum to lay claim to the lead in this race: Terra Money.
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Other blockchains have focused their efforts on making the technology safer, faster, easier or more versatile for crypto enthusiasts. Think of the blockchain like an operating system like Unix or DOS. The various upgrades to this “operating system” and the many apps that have been developed on top of the existing blockhain infastructure or ‘operating systems’ like Ethereum have largely been for insiders and crypto natives. Terra’s approach is more like Apple’s and Terra Form Lab’s co-founder Do Kwon’s vision is as grand as Steve Jobs’ was back in the 1990s. Do and the Terra team have designed the technology from the ground up for regular people to be able to use it, often without them even knowing they’re doing so. Because of this, Terra’s is fast becoming the blockchain that millions of everyday people and businesses use in the real world to spend, save and invest their money.
They do this first by creating a suite of stablecoins, each of which is pegged to a major currency like the U.S. dollar or the euro. The stability of this peg is ensured through a set of algorithms that run automatically on a distributed blockchain by scores of independent computers all over the world. And then they instill faith that people will want to hold and use these tokens by building a suite of applications where people can spend, save and invest in a way that is dramatically better than anywhere else.
Millions of people in Korea already use an app called Chai, which runs on the Terra blockchain, to pay for everyday goods. It also offers merchants a lower transaction fee than other cards (typically around .5% as compared to 2–3% for other services like credit cards). This difference in fee is very impactful in Asia and industries like ecommerce where margins can be as low as 4%. Another key advantage is that Chai offers near instant settlement (typically six seconds), as opposed to traditional providers who hold the cash for a week or more, which is crucial for these merchants who often have no working capital.
People can also save their money in Terra using an app called Anchor and earn liquid and dollar-pegged stablecoin yields on the order of 20% for a risk materially lower than assets bearing similar return profiles.
Unlike the highly variable yields in “defi” apps on other blockchains (which rely on the borrowing demand from high-risk and fickle traders and hedge funds), the Anchor lending rate is powered by a diversified stream of staking rewards from major proof-of-stake blockchains.
The borrower collateralizes their loan by depositing their income-generating staked tokens and hypothecating the income stream from these staked tokens to Anchor. Anchor, in turn, pays these highly secure and predictable yields to the Anchor depositors. Currently, and for the medium term, the rate that depositors of Terra U.S. dollar ($UST) stablecoins receive is just under 20% APY. This 40x what a similarly liquid account at a bank yields today.
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And finally, people can invest their money through the Mirror protocol, which also operates on the Terra blockchain. Mirror is a way to invest in tokens that reflect the real-world price movements of assets like a stock or commodity. As long as there is a reliable price signal that a smart contract can respond to, it can be mirrored in crypto.
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The real promise of mimicking real-world assets like Tesla or oil or Apple stock on-chain isn’t that people can now buy stocks or commodities with Bitcoin or $UST. This does have some value since using crypto money to trade stocks or commodities or the like allows anyone in the world (even if they don’t have a bank account or a computer) to deploy their knowledge or expertise and use their smartphone to start putting their savings into some of the best assets in the world, no matter the country the person or the asset is in. In addition, it is useful to have the ability to trade and settle instantly, permissionlessly and 24/7/365. And there is value in the fact that mirrored assets on the blockchain can be fractionalized so people can buy even a penny’s worth of a real-world asset and pay virtually no fee to do so (and wait only a few seconds for their trade to settle).
All of those features are positive, but the highest value of these synthetic assets is that they are now minted as decentralized “primitives” that can be composed like lego blocks into different uses within a censorship resistant digital landscape. Assets can be collateralized and fractionalized; leverage can be secured instantly and permissionlessly; decentralized and customized liquidity pools or decentralized exchanges can be created; imaginative indexes and ETFs can be established and managed by anyone anytime through smart contracts; and derivatives can be created and mixed by anyone.
Because Terra is fast becoming the best way in the world to spend, save and invest your money, Terra’s universe of stablecoins will likely be the biggest threat to the continued dominance of the U.S. dollar. We may well be at one of those moments that historians will write about in the decades and centuries to come. Except this time, rather than a single nation dominating global commerce, it could be a self-governing, autonomous and unstoppable piece of software quietly developed by a group of extraordinary entrepreneurs like (Do Kwon) based in Korea and across the globe.