Terra 2.0

TERRAFORM LABS

Terraform Labs is the company founded by Do Kwon and Daniel Shin that launched the Terra blockchain. They maintain certain key aspects of the protocol such as the front-ends and contribute to the development of the chain. They have previously played a large part in attracting external capital and partnerships to the protocol, though this has dramatically slowed down since the UST depegging event. 

DEVELOPER TOOLING

Developer tooling primarily consists of Terrain and terra.js/terra.py. Terrain aids in the development of dapps by providing Smart Contract scaffolding and frontend support. Though Terrain provides templates that expedite basic stages of dApp development, the backend and smart contract functionalities primarily use Cosmwasm1.0 - which is separately maintained. Terra also has javascript and python SDKs that can help users interact with the Terra blockchain. Terra’s commitment to developer tooling has seen mixed results, as they currently have 38 ecosystem projects at the time of writing, or up to 88 including those self-identified here. 

TERRA STATION

Terra station is the network’s primary user interface and tooling aggregator for network participants to access wallet services, token swaps via TFM, staking, governance, contracts, and NFT services.

BRIDGING

Terra makes use of IBC and Axelar to bridge assets around the Cosmos interchain and to other chains such as Ethereum/Avalanche respectively. Though this was a key catalyst for growth when the protocol revolved around providing stablecoins, the current lack of interchain demand drivers has seen cross-chain volumes for Terra fall significantly.

The hard fork that spawned the new Phoenix-1 mainnet made two key adjustments from the original chain: the removal of UST (and other stablecoins) and algorithmic redemption mechanism, as well as the removal of Terraform labs, Luna Foundation Guard, and Community Pool wallets from the new chain’s initial allocation. Though the value proposition for the new chain was to preserve the alleged strong community the network was able to build up, the removal of its core differentiating feature (though a failed one) had stripped away much of what made the chain economically attractive and functionally unique. At time of writing, DeFi TVLs have dropped from a high of $20B under the old model to $24M.

Token Utility

Terra v2’s LUNA has 3 key Utilities:

LUNA became the sole native currency after the stable coins were removed, meaning that it is the only token that can be used for fees. Previously, there would have been a commodity/dividen utility observed when the demand for UST increased - though that is no longer the case, and the supply of LUNA is almost strictly inflationary.

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Token Supply

The distribution of the token was designed in part to compensate users for the depegging and eventual hyperinflation of the original Luna token (LUNC). This could have been in an attempt to make users whole, for favorable optics moving forward, and/or to bootstrap the user base for the new chain. Following the depegging, a fair portion of token holders that were left to ‘hold the bag’ might have been those contributing to the security of the network - i.e. delegators and validators. To viably create a new app chain, Terra needed to bootstrap a validator set. Putting resources into the hands of stakeholders that previously performed that role may have been the protocol’s best chance to do so quickly. 

Terra chose to hard fork as a means of bootstrapping the app chain. To do so, the protocol defined a block considered to be ‘pre-attack’, and a block considered ‘post-attack’ and distributed the new LUNA tokens to the members likely affected by the depegging. The characterization as the depegging as an attack is one instituted by the official Terra documentation. As noted previously, there are notable omissions in the distribution of the LUNA token, as the Terraform labs, Luna Foundation Guard, and original Community Pool. This is to ensure that the project could start from scratch, and was more controlled by the community. 

LUNA’s inflationary supply will gradually transfer wealth from those who do not secure the network to those who do, through block rewards. The supply is considered inflationary even though there are sinks, since the sinks are implemented as deterrents, and shouldn’t scale with usage metrics to have material sustained impact on the token’s overall supply. Similar to other inflationary models, given constant demand, this applies downward pressure to the price of LUNA over time. This makes it difficult to supplement validator rewards over time unless the demand for LUNA increases, or if the decrease in rewards can be subsidized by an increase in transaction fee flow. 

Unlike the Cosmos Hub, there is no target stake rate, as inflation is fixed at 7%. This means that every subsequent bonded LUNA reduces how much each existing deposited stake can receive from block rewards. This results in a lower overall stake ratio and may make the network less secure.

An unsustainably designed algorithmic stablecoin model forced Terra to pivot quickly in the aftermath of  depegging. The simple removal of what made the system harmful was insufficient in creating a competitive cryptoeconomic system— Terra v2 seems like a fairly vanilla smart contract platform now, lacking the native UST the v1 had and now having little unique relative to other L1s.

The stack diagram shows what remains of the network’s structure after the removal of the UST mechanisms. The project rests on the architecture template provided by the Cosmos SDK and most of the on-chain features that are technically native to Terra are heavily sustained and conceived by other parties. The validator/delegator model is a product of Tendermint and the Cosmos SDK, as well as the governance system. Smart contract functionality is also spearheaded by Cosmos, and is now maintained by the Hub as well as the Juno appchain. 

Observing the key token interactions is another way of visualizing just how much Terra lost. Users clearly came to Terra for the opportunities that UST, specifically earning inflated rewards on Anchor, provided. The reason users held LUNA therefore was to speculate on the ongoing success of the mechanism that now no longer exists.

Finally, the token sections highlight the token utilities that require a threshold level of consistently increasing demand to succeed. Though demand is ultimately required for almost all cryptoeconomic systems, it’s the mix of this with the lack of unique incentive that makes the Terra case especially worrisome. Users can currently earn 18.32% staking ATOM on the Cosmos Hub, though by arguably taking on more risk they can earn less yield on Terra: 13.59%.