What is Terra Money?

Sept 14, 2021

Written by Noah Walker & published by BlockMaxi.com.

Table of Contents
Purpose 3
Introduction 3
Cryptocurrencies & Blockchain Technology 3
Why do we need the improvements of blockchain technology? 4
The Problem with Most Cryptocurrencies = Price Changes Volatility 5
Enter Terra Money 5
How does Terra Money Work? 6
Types of Stablecoins 6
All Money is Backed by Underlying Value 7
The LUNA Token 8
Price Oracles 10
Risks & Stress Tests 11
The Death Spiral 11
Terra’s Major Stress Test 13
The Threat of Government Regulation 14
Closing: The Unique Value of Terra Money 15

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Purpose
To explain the immense value of Terra Money in plain English.

Intro
To understand Terra Money, it’s important to first discuss cryptocurrencies 1 and blockchain
technology as well as the benefits/problems with these assets.

Cryptocurrencies & Blockchain Technology

Today, most money is sent or spent in an electronic form. This occurs most often through
groups of computers managed by banks or credit card companies. Together, these groups of
computers form a secure network for sending money. Sending money electronically is
beneficial because sending physical money is far riskier and expensive. In other words, putting
money in an electronic form is clearly useful for people.
However, many people believe that further improvements to the forms of electronic money are
possible. This is why Bitcoin and cryptocurrencies exist.
These new and better forms of electronic money are on blockchain networks, rather than the
networks of banks or credit card companies. Blockchain networks are complicated. But, in
summary, a blockchain network is a network of computers that are stringing together records of
transactions. These transactions are then grouped and processed together. These transaction
groups, also called blocks, essentially function as a computer accountant keeping track of who
owns what and how much. In order for a new group or block to be created, the network
members must agree on which transactions to include.
Depending on the cryptocurrency or blockchain network, there are different ways that the
members of the network ultimately agree on the correct transactions to record. These methods
of agreement are called consensus mechanisms.2 Beyond these details, blockchains become
very complicated. But, the important thing to know is that blockchain networks can be:
1. secured by cryptography: this is basically complicated math
2. nearly unstoppable: since they are distributed or decentralized around the world, unless
the internet shuts down
3. virtually un-hackable: unless you control a majority of the members of the network
These are massive simplifications of blockchain technology, cryptocurrencies, and the concept
of decentralization. But, discussing much further is likely to distract from the purpose of this
paper.
However, one final note: the computer code of nearly all cryptocurrency blockchain networks
can be fully viewed by the public. This means that larger blockchain networks are constantly
reviewed by literally thousands of developers to ensure that there aren’t any bugs. 3

1 The term “cryptocurrency” is often used throughout this paper. At times, a more precise term would be
“cryptoasset.” However, cryptoasset is not a common word. Even the word asset is not often used by people outside
of finance. Thus, the more common word/phrase “cryptocurrency” is used more liberally.
2 The most common consensus mechanism among blockchain networks is called Proof-of-Stake (PoS). This is a

consensus mechanism wherein network participants are required to own the cryptocurrency in order to participate in
validating the network.
3 Computer programs and code that is publicly available for review and/or suggested changes is called open-source.

A common example of this outside of crypto is Google Chrome. This web browser is powered by open-source

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That’s enough for now about blockchain technology. 4
Given all the above, cryptocurrencies built on blockchain technology make the following
possible:
1. Secure and nearly instant global transactions
2. Lower fees when sending money electronically
3. Sending money 24/7
4. Better returns on savings accounts by lowering money management costs
5. Payments that can’t be reverted or changed later
6. Low costs of exchanging one currency for another (i.e., low foreign exchange rates)
7. Money that is secure from computer hacks or burglary
8. An economic system not as easily harmed by dictatorships or corrupt gov’t
9. A complete and public record of all historical transactions
10. Secure, instant, convenient, and automated lending to people who don’t have bank
accounts or credit scores
In short, cryptocurrencies represent a new opportunity to improve the world’s financial system.

Why do we need blockchain technology?

Most citizens in countries like the United States don’t fully understand all the benefits of crypto.
This is because the financial systems in many first-world countries are strong, inclusive, trusted,
free, and not critically harmed by criminal activity. However, even first-world financial systems
are very expensive, slow, only open during certain hours, and often very disconnected from
people in other countries.
For example, even as US residents, it is very difficult and expensive for Salvadorans working in
the United States to send that money back to their families in El Salvador. Many people pay fees
that exceed 10% and then family members in El Salvador may risk crime when they go to
physically receive the cash from a place like Western Union. Furthermore, people often are
forced to use cash in countries like El Salvador because they often don’t have bank accounts.
However, cryptocurrencies are fixing this. Money transfers sent in the form of a cryptocurrency
like Bitcoin are very different. These only take seconds, cost very little, and can easily be done at
any time of the day. Bitcoin transfers also don’t require someone to risk being robbed when they
receive the money. Given this, El Salvador recently made Bitcoin an official currency in their
country. This means that no capital gains taxes will be collected on Bitcoin and that the
government is actively encouraging the use of Bitcoin. To be clear, this is not a small number of
people encountering this problem. Roughly 20-25% of El Salvador’s economic activity is directly
related to money sent from family members working in the United States. 5 Thus, the
improvements of blockchain technology are literally a matter of life or death for many
economies around the world.
Again, even for sending or spending money within the US, cryptocurrencies still offer massive
improvements. For example, a business in the United States using cryptocurrency could:

computer code and benefits from an abundance of independent developers who constantly review the code, suggest
changes, and build browser extensions to enhance its features.
4 For a longer explanation of blockchain technology, see Don Tapscott’s TED Talk “How the blockchain is changing

money and business.” Delivered on September 16, 2016.

5 El Salvador: Remittances, percent of GDP. TheGlobalEconomy.com. Accessed here in Sept 2021.

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 ● run payroll and the employees would receive the money in seconds
● transfer money to other bank accounts or businesses on weekends
● earn better interest rates on savings through lending directly and securely to others
● be free from worrying that a payment processor like Stripe may revert revenue due to
false customer complaints
● pay foreign manufacturers in their local currency with the absolute best exchange rates
● reduce the amount of physical cash that an employee could steal
● keep clear, easy records of all transactions automatically if ever audited by the IRS
Thus, cryptocurrencies on blockchain technology are truly revolutionary. They provide the world
with the possibility of massively improving the way that money is stored, spent, and saved
everywhere.

The Problem with Most Cryptocurrencies = Price Changes Volatility

It is extremely difficult for anything to be used like money if its price changes all the time.
Let’s use Bitcoin as an example. Why would someone want to spend their Bitcoin if the price
might double in two days? On the other hand, why would someone ever agree to a contract that
pays them a salary of two Bitcoin annually if the price might drop ninety percent?
To be fair, Bitcoin is still relatively new. Its adoption is still rapidly increasing and this leads to
fast price increases. These rapid price increases then leads to large numbers of people rapidly
putting money into Bitcoin which then leads to massive price drops when people take profits.
Bitcoin’s price is starting to stabilize. Nevertheless, it’s still extremely unstable compared to the
U.S. dollar. So, until Bitcoin adoption is complete, these massive price changes will almost
certainly continue.
What does all this mean?
This means that Bitcoin, as well as most other cryptoassets, are not likely to be used as money
in the near future due to their price volatility.

Enter Terra Money

Terra Money (or simply, “Terra”) is a new form of money built upon blockchain technology.
The money sent in this network are, in fact, cryptocurrencies. But something is very different
about these cryptocurrencies: their value always stays the same. Or, more accurately, the
cryptocurrencies in this network are always “pegged” to the value of real-world currencies
issued by governments.6
For example, the following cryptocurrencies all exist in the Terra network 7:
● Terra USD (UST)  cryptocurrency always tied to the value of the U.S. Dollar
● Terra KRW (KRT)  cryptocurrency always tied to the value of the Korean Won
● Terra EUR (EUT)  cryptocurrency always tied to the value of the Euro
● Terra AUD (AUT)  cryptocurrency always tied to the value of the Australian dollar

6 These real-world currencies are frequently called “fiat currencies.” Per Merriam-Webster dictionary, if something is
fiat, then it is the result of an “authoritative or arbitrary order.”
7As of August 2021, Terra cryptocurrencies track more than 15 global currencies. These also include Terra’s

Canadian dollar (CAT), Terra’s Swiss franc (CHT), Terra’s British Pound (GBT), Terra’s Hong Kong dollar (HKT),
Terra’s Chinese Yuan (CNT), & Terra’s Mongolian Tugrik (MNT).

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Thus, by keeping the value of its cryptocurrencies always pegged to the value of real-world
currencies, Terra cryptocurrencies are very different from most crypto assets.
Of course, unlike cryptocurrencies like Bitcoin, Terra’s cryptocurrencies can be indirectly
controlled by people outside the network because they are tied to real-world currencies. For
example, if the U.S. government decides to print more money and inflate the currency, then UST
will fall in value just like USD.
But this is the price – pardon the pun – of being easier to use in the real-world. 8
Outside of this trade-off, Terra retains all the benefits of other cryptocurrencies built on
blockchain technology.
But it is much more usable.

How does Terra Money Work?

Cryptocurrencies tied to the value of traditional currencies are called stablecoins. This name
makes sense – the prices of the coins are always stable (in relation to the traditional currency
they follow).

Other stablecoins, besides Terra, do exist. These include Tether USD, Gemini USD, and BUSD.
Notably, USD Coin (USDC) is growing very quickly and its issuer, Circle, is currently in the
process of becoming a publicly traded bank.

Clearly, the ease of using stablecoins coupled with the benefits of blockchain technology are
leading to rapid adoption. As of August 2021, the total value of all cryptocurrency stablecoins is
roughly $120 billion. This means that the value of all stablecoins is roughly 5% of all
cryptocurrencies. That said, Terra’s stablecoins are only about 2-3% of that $120 billion. So,
what makes Terra different? Why is it special despite its currently rather small share of the
market?

The answer lies in how Terra works.

Types of Stablecoins
Without question, the price of stablecoins must remain stable or they are failing at their core
purpose.

There are basically three options for stabilizing the value of a stablecoin:

1. Stablecoins fully backed by the underlying currency: These stablecoins are issued by an
entity or group (like Circle) and are fully-backed by the currency they track. Or, similarly,
they are fully-backed by other assets (like Treasury bills 9) that are very similar to the

8 Although a user of Terra stablecoins would still be subject to the risk of inflation, Terra Money makes it much easier

for a user to simply switch to a different global currency if their currency is being devalued. In this sense, Terra Money
actually introduces freer market competition to global currencies. Additionally, users of Terra can purchase Terra’s
LUNA token as a hedge against inflation. This is discussed in more detail later.
9
Treasury bills, or “T-bills,” are short-term gov’t debt obligations backed by the U.S. Treasury Department. In other
words, people who buy T-bills are basically lending the U.S. gov’t money. Anyone holding a T-bill is owed money by
the U.S. gov’t with the guarantee of the U.S. Treasury Department. An asset like this may be considered very similar to
the U.S. dollar in terms of its creditworthiness / risk correlations.

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 actual currency. A critical problem with this kind of stablecoin is that it is not
decentralized. Therefore, this stablecoin type is risky because the issuer could go out of
business, be shut down by local authorities, or may censor people/transactions they
don’t like. On the flip side, this kind of stablecoin is very secure because the coins are
basically just IOUs to the real-world currency.
• Examples: USDC, Gemini USD (GUSD), and Paxos Dollar (USDP)
2. Stablecoins collateralized by crypto: the value of these stablecoins is maintained by the
fact that there is an underlying treasury of crypto assets. This means you can always
swap the stablecoin for a cryptoasset. This is similar to how gold used to be the
underlying asset that backed the US dollar (e.g., you could exchange the bills for gold
with the US Treasury). Crypto collateralized stablecoins can be more decentralized than
stablecoins fully-backed by the underlying currency. So, crypto-collateralized stablecoins
are less risky in regards to a single point of failure. However, such stablecoins risk the
possibility of the Treasury’s cryptoasset values dropping dramatically; to the point where
the collateral doesn’t adequately back-up the value of the stablecoins. 10
• Example: DAI (issued by MakerDAO)
3. Non-collateralized stablecoins11: these stablecoins are not backed by any underlying
collateral. Instead, the values of these stablecoins are maintained by protocols or
mechanisms. The Terra network is the only mainstream, major stablecoin of this kind.

All Money is Backed by Underlying Value

Many people are not comfortable with non-collateralized stablecoins due to the lack of
underlying collateral. But, a lack of underlying collateral is not the same thing as a lack of
underlying value. There is currently no underlying collateral for any global currency.

All real-world, govt issued currencies exist without collateral – but they do not exist without
value. The value of such currencies is placed on them subjectively by humans. This
determination of the value of the US dollar, for example, is some combination of faith in its
future value as well as its current utility within its own network. Therefore, any stablecoin
seeking to be non-collateralized like the real-world, fiat currencies must also draw upon their
current utility as well as the faith of its users.

This last point is pretty confusing. But, it helps to think of it like this: money is simply a medium
of exchange. It’s main value to users isn’t something else that’s underneath it. The main value
of money to its users is simply to provide people with a way to communicate and agree upon
the value of other things. By acting as a medium (or language) of exchange, money allows
people to store, spend, send, and calculate the value of resources more easily.

It’s worth repeating: the main value of money is not something else that’s under the money. The
main value of money lies in its ability to act as a language for calculating and agreeing on the

10 Another issue with the largest of these stablecoins, the DAI issued by MakerDAO, is that a lot of the crypto treasury

backing the DAI stablecoin is simply… well, another stablecoin issued by USDC. This means that MakerDAO is subject
to the same risks of USDC (censorship, centralization) as well as its own risks from not being fully-backed by USD.
11 These are often also called algorithmic stablecoins because algorithms & rules within the network are what

maintain the price

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prices/values of other items. Therefore, standalone currencies may keep & retain some degree
of value without an underlying, redeemable asset.

With that said, Terra stablecoins are not standalone currencies. The prices of Terra stablecoins
must remain stable relative to the gov’t issued currencies they track. But this is problematic
because the utility, faith, and supply of Terra stablecoins within its network is vastly different
from, for example, the US economy (which essentially acts as the underlying network agreeing
upon the value of the US dollar).

Therefore, Terra needs a mechanism by which it can adjust the supply / demand for Terra so
that it correlates with the supply / demand of the US dollar.

This mechanism occurs through the LUNA token.

The LUNA Token

Owning the LUNA token means literally owning a piece of the Terra network. Therefore, owners
of the LUNA token who participate in validating the network:

● can to vote on changes to the network: this is commonly called governance

● receive the network’s transaction fee revenue: paid out to those validating the network
in a format that is almost like a constant dividend. Transaction fees for users within the
Terra network are never
● are entitled to other rewards: ownership positions in new projects built in the Terra
network are frequently distributed to those validating the network.12

This means that the LUNA token is a productive asset. It represents ownership and a claim on
the revenue generated by the Terra Money network. As faith and utility within the network
grows, the value of LUNA also grows along with the fees that are paid to LUNA owners.

But, most importantly, the LUNA token stabilizes the prices of Terra’s stablecoins. 13 Whenever
the price of a Terra stablecoin starts to rise or fall from its peg to a real-world currency, market
pressure needs to be applied to normalize the price. This market pressure is applied through an
arbitrage mechanism involving the LUNA token and built directly into Terra’s network protocols.

Arbitrage is when someone takes advantage of price differences to make a profit. Terra’s
arbitrage mechanism essentially incentivizes investors to apply whatever market pressure is
needed to keep Terra’s stablecoin prices pegged to the real-world currencies.

For example, if 1 Terra USD (UST) falls in value to $0.97, then UST is “de-pegged” by three
percent. However, if UST stablecoins are removed from the market, then less supply -- assuming
the same demand – means that the price of UST can rise back to its peg of $1.

12 Airdrops are a common distribution method within the Terra network (as well as many other crypto networks). In

an airdrop, on-chain and transparent analysis of a crypto network is used to identify user wallets which are deemed
eligible to receive free crypto tokens. Eligibility for airdrops is typically based upon wallet activity or participation in
something that benefits the community.
13 This is where the LUNA token gets its name. “Luna” and “Terra” are the Latin words for moon and earth. As the

moon’s presence helps to stabilize the earth’s orbit around the sun, the LUNA token also helps in maintaining the
correct prices for all the Terra stablecoins used around the world.

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However, reducing the supply of UST costs money. Nation-state central banks typically
add/remove money from circulation through methods like issuing/purchasing bonds and/or
printing money. In Terra, the supply of UST is instead reduced by the protocol creating and
selling new LUNA tokens to the public. These LUNA tokens must be bought with UST and the
protocol treats the UST as if it is worth exactly $1. So, if the price of UST falls to $0.97, this
means that people looking to make a quick profit can:

1. buy 10 UST currently for $9.70

2. purchase $10 worth of LUNA using the 10 UST
3. sell $10 worth of LUNA for $10
4. make a quick profit of $0.30 (approx. 3%)

In other words, if the value of UST falls, the Terra network basically says, “No, for us, 1 UST is as
good as 1 USD if you want to buy more LUNA.” This makes it economically attractive for people
to essentially “turn in” their UST in exchange for LUNA; since they are effectively purchasing
LUNA at a discount.14

Conversely, if the price of 1 UST rises to be more valuable than 1 USD, the Terra network allows
people to essentially “turn in” or “burn” LUNA tokens in exchange for UST. Again, the Terra
network always respects the peg. Let’s say that the current value of 1 UST is 1.02 USD (in other
words, UST is worth 2% more than what it should be).

This means that someone looking to make a quick profit can:

1. Buy 20 USD worth of LUNA tokens in the free market

2. Sell (or “turn in”, “burn”) their LUNA tokens to the Terra network
3. Receive 20 UST in exchange
4. Turn around and sell those 20 UST for 20.40 USD (2% profit)

This can be repeated until the market value of UST matches USD because supply/demand are
now appropriately adjusted.

Of course, this means that there is not a set supply of LUNA tokens within the Terra network.
The supply of LUNA tokens can actually increase relatively quickly in the event of a dramatic
market event. But, over the long-term, the supply of LUNA tokens decreases with increasing
demand/usage of Terra Money stablecoins.

Given the risk of short-term volatility and diluted ownership, LUNA token holders are rewarded
for securing, stabilizing, validating, and governing the network. These rewards occur in three
main ways:

1. Transaction fees: token holders receive fees on transactions within the network. The
protocol’s usage determines transaction fees. Generally, fees on transactions range
from 0.5% to 1% and this revenue is prorated & distributed to LUNA holders staking their
tokens in the network.

14 The financial term for this is called arbitrage. In this scenario, arbitrageurs with resources can quickly purchase lots

of UST at a price of $0.98 per 1 UST...but then quickly buy LUNA tokens with the UST and sell those LUNA tokens for
a 2% profit.

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 2. New Project Airdrops: p new projects and/or crypto protocols launching in the Terra
network frequently choose to distribute/give tokens to LUNA owners free-of-charge. The
motivation in doing this is twofold: (1) reward and incentivize people to secure and
stabilize the ecosystem and (2) tap into Terra’s strong community for early liquidity &
engagement.
3. Increasing Ownership percentage: as demand for Terra stablecoins increase over time,
LUNA token holders benefit from the massive amount of LUNA tokens that are
essentially “burned” to create more stablecoins. This kind of value accrual for LUNA
holders mirrors something like a stock buyback.

In a very real sense, owning the LUNA token is a bit like owning a piece of Terra’s central bank.
However, LUNA token holders are held by people literally all around the world. So, Terra Money’s
“central bank” is, in fact, very decentralized. Additionally, unlike nation-state central banks, Terra
is not supported by the threat of force. Instead, Terra’s issuance is supported by actual user
demand. Its portfolio of stablecoins also introduces market competition to nation-state
currencies. Thus, Terra’s governance and issuance methods are actually preferable over the
central banks of nation-states in multiple ways.

In summary, the LUNA token absorbs the short-term price volatility of the Terra stablecoins in
exchange for long-term value accrual, revenue, and governance rights.

Price Oracles & Validators

All stablecoins need to be stable relative to the value of the gov’t issued currency they track. In
other words, the Terra network needs to know that its UST stablecoin is stable relative to USD.
This is very difficult because a good cryptocurrency must be free from the risk of tampering,
outside manipulation, computer hacking, or thefts. So, somehow the price of USD relative to
UST must be inputted into Terra’s network. How is this done without risking a hack or theft?

Terra’s solution is to have the members of the network vote on what they believe should be the
current exchange rates. In other words, voting network members act as trusted “price oracles.”

To be a voting member of the Terra network, users must own and deposit LUNA tokens in
something like a vault. This vault-like mechanism is called a smart contract. This allows users
(or someone else on their behalf) to vote on which transactions are valid as well as what the
current prices of real-world currencies should be. These votes are cast through what’s called a
validator; which is basically just a computer address in the network with voting rights.

To ensure that Terra validators (and by extension, its members) are voting honestly, the network
requires that all voters deposit LUNA. The network then rewards votes for being as close as
possible to the right answer (which is the median of all answers) and penalizes voters who vote
inaccurately.

This is a little bit of game theory – but it’s also proven to be very effective. Besides the
rewards/penalties related to voting, members of the Terra network are forced to keep their
LUNA tokens locked in the vault for at least the next 21 days each time they vote. So, all Terra
members validating the network are incentivized to maintain the value of the system.

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Risks & Stress Tests
The Death Spiral
The common critique and risk of any non-collateralized stablecoin, like Terra, is that it could go
into a death spiral.

For a non-collateralized stablecoin, a death spiral is when its value hopelessly deviates from the
currency that it tracks. Alongside gov’t regulations, this is the biggest risk to all non-
collateralized stablecoins.

In a death spiral,

1. the stablecoin loses its peg (ex: 1 UST is now worth .8 USD)
2. people panic and sell their stablecoins at a loss
3. the panic selling further damages the peg (ex: 1 UST drops even further, now worth only
.5 USD)
4. this repeats until the market price of the stablecoin is driven to virtually zero

There are historical examples of this death spiral occurring to non-collateralized stablecoins.
One recent example occurred in June 2021 with the IronFinance stablecoin. In this alarming
event, the IRON stablecoin lost its peg to the USD and dropped to basically zero as investors
desperately tried to sell their tokens. Many investors lost millions; including Mark Cuban who
reportedly lost more than $7 million. 15 So, death spirals are not theoretical. They are actual
events with non-collateralized stablecoins.

So, will Terra experience a death spiral?

This appears to be increasingly unlikely with continued adoption for several reasons:

1. All global currencies are subject to this same death spiral risk; yet most retain their
utility. Death spirals are basically just hyperinflation events. The USD and virtually all
global gov’t currencies also risk death spirals since they are also non-collateralized. In
fact, both the Venezuelan bolivar and the Lebanese pound experienced devastating
death spirals (i.e., hyperinflation) in the last few years. The annual inflation rate was
roughly 80,000% for the Venezuelan bolivar in 2018 16 and approximately 88% for the
Lebanese pound in 2020. 17 However, with notable exceptions in collapsing economies,
most global currencies maintain enough value to preserve their continued use). 18

15 The full details of the IronFinance death spiral event are beyond the scope of this paper. You can read more about

the event here on Finematics.com.

16 Hyperinflation in Venezuela: How to Address the Problem. Reily, Sean. Published by the University of Texas at

Austin. Accessed in August 2021 online here.

17 Lebanon: Inflation rate from 1985 to 2020. Published by Aaron O’Neil on Statista.com Accessed in August 2021

online here.
18 Nation-state governments do possess an important power that helps to mitigate the risk of death spirals: the threat

of the sword. This allows them to, for example, require that citizens pay future obligations (like taxes) in the country’s
currency. This ensures some measure of future demand for the currency. Additionally, governments can and do set
artificial exchange rates for their currencies (for example, Argentina frequently imposes a fake exchange rate for its
peso). Governments also own assets that they could choose to sell in support of their currency. But, historical
examples of such powers prove that all of these measures ultimately prove ineffective. Governments cannot support
a non-collateralized currency through these means when the underlying network -- its people and economy -- is

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 2. Terra is non-collateralized, but it is backed by value. Terra stablecoins (and gov’t issued
currencies) are non-collateralized in the sense that there’s no directly redeemable,
tangible assets. However, Terra and gov’t issued currencies are still supported by an
immense amount of value via:
• their utilities as exchange mediums
• the ability to store, spend, send, and calculate the value of resources easily
• the processes, organizations, and economies built on/within their networks
• the faith of network participants
• their massive network effects
• future obligations denominated in the network’s currency (Terra’s network can
greatly improve on this point)
3. Unlike most other algorithmic/non-collateralized stablecoins, Terra attracts users
through a sustainable & useful network. Most – if not all – other non-collateralized
stablecoins accrue value and mint new stablecoins through “yield farming.” In crypto,
yield farming occurs when token holders deposit their assets into liquidity pools and/or
other mechanisms for the purpose of receiving rewards. These rewards are typically
newly minted tokens of the same type deposited. This is similar to a nation-state gov’t
printing lots of new money in return for being given money (i.e., massive quantitative
easing). Since crypto is a largely free market, yield farming returns sometimes reach
3000%+ APR (as was the case with IronFinance). That’s insane and resembles a Ponzi
scheme. However, yield farming with much lower, reasonable returns can be an effective
way for new crypto protocols to attract users and increase liquidity. That said, Terra is
different in that it is relying on its organic network effects and utility to attract users; not
unsustainable yield farming. 19 20

• Example  Chai: The South Korean payment application, Chai, is a payment app
used by more than 2400 merchants in South Korea. This payment app is similar
to Stripe or Square – but it runs on Terra’s blockchain network. This allows the
app to charge much lower transaction fees and settles transactions instantly.
Chai is currently seeing 55,000 daily active users register more than 90,000
transactions totaling roughly $1.5+ million on a daily basis. 21 This is nothing
close to the scale of mainstream payment applications. But, considering that

greatly damaged. Even the US dollar is slowly (or not slowly during COVID-19) losing its value in respect to real-world
assets.
19 Anchor Protocol is a foundation project built in the Terra network. Its purpose is to attract more users to Terra and

increase demand for UST. Anchor Protocol does this by providing users with secure, predictable, and attractive
interest income on their deposits. This is, essentially, yield farming. However, the returns on deposits stay between
18-20% APR; which is attractive but reasonable. Furthermore, the returns paid to depositors are generated through
actual incomed earned via putting the collateral to work in a variety of uses (incl. validating crypto networks, liquidity
pools, etc.). This is very different than unsustainable yield farming practices that provide rewards to depositors via
simply minting, for example, more UST or LUNA.
20 Other practices implemented in the Terra network that increase sustainability include the 21-day lock-up period for

staking LUNA, Terra’s increasing interoperability & liquidity with other blockchain networks, and the already-existing
use of Terra’s stablecoins in non-crypto applications such as the Chai payment app in South Korea with millions of
monthly users.
21 Statistics regarding Chai payment app usage can be found at https://chaiscan.com. However, this website’s

services will be discontinued in the near future when the network upgrades to Columbus-5.

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 many of these users are normal people who are otherwise indifferent to
cryptocurrencies, it’s certainly noteworthy adoption. 22
4. Terra Money is stress-tested. The founders of Terra Money ran lots of simulations and
computer models to ensure that the network would be able to survive through dramatic
market crashes and prolonged bear markets. Even in the event of 90% drawdowns, all of
the models indicated that Terra’s stablecoins would not lose their peg. Beyond this, in
May 2021, Terra underwent its first real-world, serious stress test. The result? Terra not
only survived but is now stronger. In a more recent market downturn in September 2021,
Terra’s stablecoin not only held its peg – but it did so better than fully-backed
stablecoins like USDC. 23

Terra’s Major Stress Test

Over the course of only a few weeks in May 2021, Terra’s resiliency was seriously tested by a
massive crypto market crash.

More than $1 trillion (50-60%) of value was wiped from the market capitalizations of all crypto
assets; as Bitcoin and Ethereum plunged 40 to 60%. It was a sell-off similar in size to the COVID-
19 stock market crash in March 2020. Many major crypto exchanges like Coinbase experienced
outages. The rapid sell-offs were, at least partially automated as leveraged investors saw their
positions liquidated. In Terra, users borrowing money also saw their assets liquidated so quickly
and simultaneously that Terra’s mechanisms for UST keeping its peg were affected. This
resulted in UST losing its peg for a few days. Many investors panicked and sold UST at 10%
discounts to USD. At its worst, 1 UST was worth less than 0.8 USD. This in turn forced many
others to panic sell which then led to more cascading borrower liquidations. In short, it was the
perfect setup for a death spiral.

But, it didn’t.

Instead, other than briefly losing its peg partially due to limited network bandwidth, the Terra
network functioned exactly as intended. The value of 1 UST rose back to the value of 1 USD.
More LUNA was minted to restore the peg, of course, and this meant that LUNA holders saw the
value of their tokens decrease dramatically. But, even still, LUNA only decreased in value about
20% more than most other crypto assets. So, the price plunge wasn’t particularly different than,
for example, the price plunge that Ethereum experienced during this time. Furthermore, in less
than 3 months, the price of LUNA hit all-time highs once again.

Thus, the real-world stress test of LUNA may be considered a massive success. No one really
knew how well the network could withstand a real-world market crash like what happened in

22 Other notable applications using the Terra network include the all-in-one personal finance app called Alice,
personal savings app Yotta, Mongolian payment app Memepay, and the payments website plugin PayWithTerra.
There’s also an app called Kash currently in development that will act as a front-end application for remittance
payments (via Terra stablecoins), global investing through synthetic stocks (via Mirror Protocol), and high yield
savings accounts (via Anchor Protocol).
23 Report from CoinMarketCap.com. Screenshotted & posted to Twitter by @Block_Maxi. 07 Sept, 2021.

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May. The result was that LUNA not only survived; but developers working in the network learned
valuable lessons for increasing the resiliency of the protocol. 24

Buyers at the bottom of the LUNA dip knew what they were purchasing: a now stress-tested
crypto asset unlike any other.

The Threat of Government Regulation

Other than a death spiral, the largest threat to Terra is government regulation.

It is possible that nation-state authorities may see Terra stablecoins as a threat to their control
over local monetary policy. This threat is real for any crypto asset; but it is likely an even larger
threat for any crypto asset that is essentially acting as a synthetic version of government
currencies.

However, there are multiple reasons why this threat of government regulation is not likely to
deter Terra from continuing to grow. These include:

● Terra’s stablecoins may, in fact, increase the dominance & demand for well-managed
gov’t currencies. There are many places around the world where local capital controls
prevent the use of well-managed traditional currencies like USD. Terra’s network enables
such populations to send, store, transact, and calculate value using the dollar. Although
demand for the US dollar may be diverted to UST in such instances, this is arguably
offset by general growth in the population of people who think/act in the US dollar. In
other words, the use of UST may divert some demand from the US dollar – but it likely
also increases the network effects of the US dollar as well as the use of the US dollar in
economies around the world.
● Conversely, governments issuing traditional currencies harmed by Terra stablecoins
are probably not able to enforce bans. Countries such as India, Pakistan, and Nigeria all
enacted bitcoin bans in recent years and all of the bans failed. Crypto adoption
increased rather than decreased after the ban. This is, at least in part, due to the fact
that poorly managed traditional currencies are correlated with poorly managed
governments. What does all this mean? It means that the traditional gov’t currencies
most likely to be harmed by their respective citizens using Terra (and other crypto
assets) are also the countries least capable of any sort of effective ban. These countries
already have thriving economies outside the often corrupt control of their governments.
And, if the governments cannot stop these underground economic networks, then they
will not be able to stop a decentralized, pseudonymous network like Terra.
● Any country that bans crypto or Terra is harming its economy in easily measurable
ways. Although most cryptocurrencies (including Terra) can be held in pseudonymous
wallets, nearly all transactions are clear and transparent. Thus, the amount of economic
value that the crypto technology sector can bring to a local economy is easy to estimate.
● The masses are on the side of cryptocurrencies. The increasing seizure of wealth by
nation-states may be somewhat sneaky when it’s done through inflation. But, it’s not
sneaky or easy when wealth is stored in cryptocurrencies. Since crypto can be held

24 Improvements to the Terra Money network after the May 2021 crash include increasing the capacity of the

blockchain network to handle more transactions, increasing the bandwidth of Anchor Protocol to better handle
automatic liquidation events, and introducing more bidding into the process of buying liquidated assets.

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 securely by an individual via passwords & encryption, crypto represents one of the
highest forms of property rights. This greater capacity for individual property rights
increases the ability of mass populations to resist government overreach or
unreasonable seizures of wealth. There is an inherent, mass empowerment of the
individual through crypto wallets.
● The Terra network is intentionally decentralized for the very purpose of withstanding
attacks or bans by powerful individuals, organizations, businesses, or governments. By
running its governance and security through a decentralized blockchain network, Terra
ensures that its security and resiliency increases with the value of the network. Thus,
Terra seeks to achieve all of the benefits of other truly decentralized and global
blockchain networks.
● The founders and community are dedicated to the cause of Terra. Terra’s future state is
one of a decentralized, global network that does not rely on any individual or
organization. However, the network is currently driven forward by a smaller number of
developers. One prominent member of the community is co-founder, Do Kwon, who is
outspoken about his thoughts on Terra's value to the world. In a recent interview with
Delphi Labs partner Jose Maria Macedo on Real Vision, Kwon said "It turns out it is very
difficult to regulate a company that doesn't make any money and makes plans to
disappear, and 2, it's very hard to censor a founder who doesn't care about money and
doesn't mind going to jail." 25

In summary, the threat of government regulation is always real to crypto assets but Terra’s
network is built to withstand serious outright bans and/or other serious threats from nation-
state governments.

Closing: The Unique Value of Terra Money

Terra Money’s value proposition is unique among all cryptocurrencies & cryptoassets.

If the Terra Money stablecoins succeed, then:

1. Foreign exchange & remittances will be forever changed: global settlements in

seconds for pennies on the dollar at institutional exchange rates. 26
2. Businesses around the world will see instant savings: instead of paying 1-3% of all
revenue to payment processing companies like Stripe, Terra allows for businesses to
reduce payment processing fees to less than 1%. This is massive. Most businesses
Net Profit is lower than 20% of their revenue. So, recovering 1-2% of all revenue could
mean increasing business profits by 10-20%.
3. Money will be sent 24/7: Terra’s blockchain network settles instantly around the
clock. ACH may be forced to change or lose significant market share.

25 “TERRA: PROGRESSING TOWARD THE FIRST DECENTRALIZED STABLECOIN.” The Interview – Crypto. Featuring

Jose Maria Maceo and Do Kwon. Accessed here on RealVision.com in August 2021.
26 This is not a small total addressable market. In fact, it’s the largest market in the whole world. In 2019, daily

transaction volume for foreign exchange averaged $6.6 trillion; which is around $2.4 quadrillion annually. If Terra
captures 0.1% of the foreign exchange market with 0.5% transaction fees, then this could mean $12 billion in annual
earnings to LUNA holders. With P/E ratios for tech companies often exceeding 30x earnings, this income stream
alone could mean a reasonable valuation of the Terra network may be $360 billion.

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 4. Savings accounts will yield material interest rates once again: the Anchor Protocol
in Terra Money yields 19% APY on deposits. This interest rate may decrease over
time – but it’s a dramatic improvement from traditional bank accounts which
frequently only give users 0.5% APY on their deposits.
5. Millions (and maybe billions) of workers will regain the right to make a living:
debasing, failing traditional gov’t currencies coupled with draconian capital controls
restrict the ability of millions to participate in meaningful work to make a living. A
decentralized stablecoin protocol, however, may be sufficiently outside the control of
corrupt local gov’t actors. Thus, Terra may restore the rights of many to simply make
a living.
6. The financial system will increase in its transparency: in Terra, the whole world will
be able to view movements of capital cloaked only by pseudonymous wallet names.
7. Secure, instant, convenient, and automated finance as well as lending will be
available to hundreds of millions of people: currently, the World Bank reports that
about 1.7 billion people around the world remain unbanked. 27 Terra allows for the
easy creation of a financial wallet as well as access to loans. The lack of
gatekeepers is a feature; not a bug.
8. Greater market competition will be introduced to traditional gov’t currencies. Do
Kwon doesn’t believe that Terra’s UST stablecoin can compete with the USD unless it
hits hundreds of trillions of dollars in market cap. That said, he freely admits that
once it hits $1 trillion in market cap, it will be at an escape velocity that may
successfully compete against smaller and/or less table traditional gov’t currencies. 28
In such an environment, traditional gov’t currency issues may be forced to act with
more responsibility.
9. Terra’s stablecoins will be a stress-tested, censorship-resistant, and proven
stablecoin. There are no other stablecoins with Terra’s scale that can say the same.

If the LUNA token proves to be a good investment, then:

1. LUNA will be a killer inflation hedge. As its value is derived from the success of the
Terra stablecoins, the LUNA token is amazing in that it leverages the clear utility of
stablecoins and yet, if inflation occurs, the value of the LUNA token will
correspondingly increase. For example, if the U.S. gov’t prints more USD, then UST’s
value will increase relative to USD. This means that LUNA will be burned to restore
the peg and the price of value will increase (all else being equal).
2. LUNA will be seriously deflationary. There may be periods of supply increases in the
LUNA token; but even mild adoption of the Terra stablecoins can mean significant
reductions to the LUNA supply. For example, during August 2021, the total supply of
UST increased roughly $36 million from $2.04 billion to $2.4 billion. By stablecoin
standards, this is moderate growth. But, the minting of all this UST meant that
roughly 0.1% of circulating tokens were burned every day. This is on pace for more
than 36% of all circulating LUNA tokens to be burned annually. The ramifications of
this LUNA’s price are very material. 29

27 “Universal Financial Access 2020.” The World Bank. Accessed here in September 2021.
28 Terra Money Ask Me Anything (AMA) Session with Do Kwon. Hosted on Twitter. 02 September, 2021.
29 Terra Analytics. SmartStake.io. Accessed on 02 September, 2021.

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 3. Owning LUNA means essentially owning a piece of a central bank. Governance,
transaction fees, and the benefits of issuing currency… all in the hands of LUNA
owners.
4. The Terra Money network and the LUNA token will be one of the most revolutionary
financial instruments ever created. Terra’s existence and its method of value
accrual speak to the great merits of user adoption, decentralization, stability in
financial markets, global economies, peer-to-peer transactions, and the reduction of
middlemen.

Ultimately, Terra Money’s success will be marked by the great utility of its stablecoins and the
immense value accrual to LUNA holders.

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