Why Terra Stands Out Among Rival Cryptocurrency Projects

Terra has created two cryptocurrencies. One is UST (USTC), a stablecoin intentionally pegged to the U.S. dollar. There are other stablecoins that intend to do this, but most are backed by the dollar. But with UST, its value is backed by Terra's other cryptocurrency, Luna (LUNC 2.45%), which makes things interesting.

If the value of UST drops relative to the dollar, then investors can sell UST for dollars and make money. But selling UST burns those tokens, decreasing supply and boosting UST's value back in line with the dollar. If UST's value shoots too high, investors can swap Luna tokens for UST (which exist in a one-to-one relationship) and make money this way. But swapping Luna tokens for UST creates new UST tokens, increasing UST's supply and bringing its value back down in line with the U.S. dollar.

In this video from Motley Fool Backstage Pass, recorded on Dec. 8, Fool analysts Bernd Schmid and Eric Bleeker discuss this unique approach to stablecoins from Terra. More importantly, the guys note that this system is working better than other stablecoin projects so far, meaning Terra stands out from its rivals.

Bernd Schmid: That's what Terra does and it's really smart, the system they have developed. And not only this, it actually works. Other people have developed this before. There have been a lot of competitors, but during the sell-off in crypto channel between May and June, a lot of these have actually crashed. What I just explained in the upward, so if the demand for UST, increases for the stablecoin, then the value of this [inaudible] currency, Luna in this case would increase, the price will increase. The other way it will happen also. So if the demand for the stablecoin decreases, the value of the collateral -- or of Luna in this case, the non-stablecoin -- it will actually decrease, the price will decrease. This could cause they call it a death spiral to the point if the demand collapses too fast, the whole thing would just collapse and then nothing is worth anything anymore. This is actually what happens to, I believe, almost all algorithmic stable coins in the last couple of months except Terra.

The reason is actually the other algorithmic stablecoins have been created out there, they have used financial incentives similar to what we were talking about before with games to just help people and create demand for this stablecoins, but it was not official demand. Terra is not the case.

In Terra, the first thing and the biggest thing they've done, was they went to South Korea and they have integrated into a payment system. Actually this payment system works with the stablecoin on Terra, and so the merchants which use this, they don't pay credit card fees if users pay with this. But you pay a small fee, which is much lower than a credit card fee, if they use the system. And that's actually how they created demand for the stablecoin because it's a much cheaper solution than using Visa or Mastercard, or other credit cards in South Korea. And actually to this day, it's 5% of the Korean population, I believe -- 2.5 million people -- will actually have used this. That's a natural demand for this stablecoin, and that also drives the demand for this Luna token, which makes it a very interesting proposition.

But now, because they already have created this demand, now they're starting to create network effects. This is what actually this article is about, which I found so fascinating. There is a real ecosystem developing on Terra. There's exchanges, where you can exchange other cryptocurrency tokens to UST or within each other. Then there's borrowing, lending. I won't go into this. I think this article goes into this, correct me if I'm wrong. You can get actually a 20% yield on your stablecoin. This sounds insane. It sounds like a fake. It sounds like a fraud, actually, but it's not. If you read it, it's really interesting what they've done. It won't stay at 20%, it's not sustainable, in the sense that it obviously depends on the supply and demand of credit. But right now it is, and it has been for quite some time. So it's interesting to use it. The protocol is called Anchor. This lives on the Terra blockchain essentially. Then they have also created another one called Mirror, I think is the name.

Also this article, if I'm not mistaken, goes into it. It's where we can buy synthetic stocks. I'm not sure but, for example, you buy synthetic Tesla shares, and this is backed to the shares of Tesla.

This ecosystem is just exploding because it's not only that Terra Labs. They're the founder of this blockchain and the creator of these first three applications that I just described. But other third-party developers have been jumping on this and some notable ones, also mentioned there, for example Delphi Labs. Delphi is, in my opinion, one of the great digital investors out there, more institutional focused. I think they have a hedge fund. They do great research, also very in-depth. They also have a venture arm where they provide venture capital, but also they have a technology department, so to say, where they develop blockchain solutions. They've started to develop solutions on Terra, and now the ecosystem is just exploding. Which means it might, depending on how well the solutions will work and how good they are, also compared to the other Layer 1's, for example Ethereum and Solana, we've talked about before. I imagine it can create an inflow of new users, and increase a demand for UST.

This is what this article is about. He describes it way better than I have just done. But goes into also in quite detail. I suggest everybody who is interested to read it. It's a fascinating project to follow. I believe, it seems like a lot of interesting things coming there in the next couple of months and years hopefully.

Eric Bleeker: Two things just quickly on this. No. 1, let's push Fetch.ai to next week or a future one because I know you have a lot to say about that. I want to get to some questions, too.

This is what's so great about crypto: Right when you think you've seen it all, you start seeing things like synthetic stocks [laughs] that just take it to a whole new level. I do love that quote from you about the 5% usage in Korea. Everyone's looking for comparables of how to compare something to crypto, to the emergence of the worldwide web, and you start looking at 5% usage. You're definitely moving beyond early adopters. That is truly interesting stuff happening.