The last 12 months have taken crypto investors for a wild ride. The market plunged in May, shedding 50% of its value in a matter of weeks. Then the frenzied enthusiasm returned, sending the crypto market to new highs in November. Unfortunately, the tide has turned once again. The collective value of all cryptocurrencies currently sits at $2 trillion, a third below its all-time high.
However, there is a silver lining for long-term investors. Decentralized finance (DeFi) applications -- products that feature programmable money, making it possible to borrow, lend, and earn interest without going through a bank -- make financial services more efficient. And investors are throwing money at these platforms. Over the past year, DeFi investments have soared 1,000% to $242 billion.
More importantly, given its value proposition, I think DeFi will continue to gain traction in the years ahead. And both Avalanche (AVAX -3.64%) and Terra (LUNC -1.29%) have become key players in this emerging industry, a quality that makes both cryptocurrencies smart long-term investments. Here's what you should know.
Image source: Getty Images.
1. Avalanche
Avalanche is a smart contracts platform designed to support scalable decentralized applications (dApps), including DeFi products. The blockchain is secured by so-called snow protocols, a type of Proof of Stake consensus in which validators verify transactions by sampling a small subset of nodes (computers), rather than waiting for each node to reach agreement with every other node. That makes Avalanche fast.
In fact, Avalanche is the fastest smart contracts platform in the blockchain industry in terms of time to finality. The network has been clocked at 4,500 transactions per second (TPS), but the developer team believes that figure could reach 20,000 TPS. And those transactions are finalized in less than two seconds (i.e. irreversibly added to the blockchain).
Moreover, Avalanche is compatible with Solidity, the programming language used to build dApps on the Ethereum blockchain. In other words, developers can easily deploy their Ethereum dApps on Avalanche too. That interoperability has already been a significant growth driver. In fact, Avalanche is the fourth-most-popular DeFi ecosystem, with $11.2 billion invested on the platform.
In short, Avalanche is fast, scalable, and interoperable. And in the coming years, those three qualities should make it more popular with dApp developers and users, as well as DeFi investors. As that trend plays out, demand for the AVAX token should rise, driving its price higher.
Image source: Getty Images.
2. Terra
Terra is a smart contracts platform that aims to make financial services and payments more efficient. To that end, it features an array of stablecoins, which are cryptocurrencies designed to track the price of fiat currencies. For instance, the TerraUSD token is tied to the price of the U.S. dollar, and the TerraKRW token is tied to the Korean won. More importantly, the entire ecosystem is powered by LUNA, another token that exists on the Terra blockchain.
The price of a stablecoin is determined by supply and demand. That means rising demand could push the price of TerraUSD above $1. In that scenario, the network would incentivize investors to convert LUNA to TerraUSD to increase supply and lower the price. Alternatively, falling demand would pull the price of TerraUSD below $1, at which time the system would work in reverse, incentivizing token holders to convert TerraUSD to LUNA.
Of particular note, Terra is built using the Cosmos framework, a blockchain protocol secured by the tendermint consensus mechanism, which itself is designed for interoperability and speed. Terra can theoretically scale to 10,000 TPS, and those transactions are finalized in six seconds. Likewise, because Terra stablecoins are built on blockchain technology, financial services powered by the platform are more efficient than traditional options.
What's important for coin holders is that they can earn interest by lending stablecoins to the Anchor protocol, a popular DeFi platform on Terra. In fact, Anchor currently pays a 19.8% annual percentage yield for TerraUSD, an interest rate that's orders of magnitude greater than what you might get from a savings account at a traditional bank. Similarly, the Chai payments mobile app is built on Terra, and its foundation in blockchain makes e-commerce transactions (including cross-border transactions) faster and cheaper.
Why does that matter? Terra is currently the third-largest DeFi ecosystem, with $16.2 billion invested on the platform. And as more money moves through products like Anchor and Chai, demand for Terra stablecoins will rise, driving demand for LUNA and pushing its price higher. Simply put, as products on the Terra blockchain become more popular, the LUNA token should become more valuable. That's why this cryptocurrency looks like a smart buy right now.
