A Beginner’s Guide to Terra's DeFi Ecosystem

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Terra is a Layer 1 blockchain protocol that aims to create a thriving payments-focused financial ecosystem offering interoperability with the real-world economy. Its two key ecosystem components are the so-called Terra currencies, scalable algorithmic stablecoins pegged to different real-world fiat currencies, and the LUNA token, a volatility absorption tool that also captures rewards through seigniorage and transaction fees.

An Introduction to Terra

Terra launched in January 2018 to build a decentralized payments system using stablecoins. Since launching, it’s become one of crypto’s most used Layer 1 networks, offering interoperability with the real-world economy and broader crypto ecosystem. A strong sign of its success is the growing adoption of its flagship product, the U.S. dollar-pegged stablecoin UST. It’s currently the fifth-largest stablecoin on the market and is regarded as one of the most decentralized dollar-pegged crypto assets. Terra has also seen increasing usage of its DeFi applications over the last two years.

Terra is built using the Cosmos SDK framework, meaning the blockchain is currently not compatible with the Ethereum Virtual Machine. However, with the recent Columbus-5 upgrade, Terra has upgraded to Stargate, which means it’s interoperable with some of crypto’s biggest ecosystems, including Solana, Polkadot, and Cosmos. The Gravity Bridge will also connect Terra to Ethereum and most other blockchains, making it easy to port Terra assets across different ecosystems.

With a total value locked of around $8.65 billion today, Terra’s ecosystem is relatively small compared to other Layer 1 networks like Ethereum, Binance Smart Chain, and Solana. However, it offers an innovative suite of DeFi applications that are not often seen in the broader crypto ecosystem. 

Exploring DeFi on Terra

Although Terra’s DeFi ecosystem is relatively small, there are a handful of standout projects that have a strong chance at becoming the network’s “blue chips.” Unlike many other projects, many of Terra’s leading protocols offer innovative DeFi solutions without cloning the most popular apps on Ethereum.

TerraSwap

TerraSwap is the first decentralized exchange on Terra. It’s an automated market maker (AMM) based protocol similar to Sushi or Uniswap, but it’s specifically built for swapping between native Terra and CW20 tokens on Terra. To use TerraSwap, users need to install Terraform Labs’ official web extension wallet Terra Station and fund it with LUNA to cover the transaction fees for swapping assets. 

Anchor Protocol

Anchor is an innovative decentralized savings protocol that offers a fixed 20% yield on UST deposits. Launched in March 2021, Anchor is one of the most popular DeFi products on Terra, with a market capitalization of roughly $384 million and a total value locked of around $3.36 billion.

Anchor doesn’t set a minimum deposit and has no lock-ups. It generates a stable 20% APY on UST deposits by lending out deposited assets to borrowers who put up collateral in yield-bearing assets. These assets, which Anchor calls “liquid-staked assets” or bonded assets (bAssets), represent staked native tokens on Proof-of-Stake chains. For example, instead of requiring collateral in LUNA tokens, Anchor requires borrowers to put up collateral in staked LUNA (bLuna) on top of the interest rate they pay for their loans. 

This means that the protocol has two revenue streams. One is the yield from the yield-generating collateral (deposits are overcollateralized, so there’s no risk for lenders), and the other is the interest rate paid by the borrowers. Anchor can offer a fixed 20% interest rate, known as the “Anchor rate,” by storing the excess real yield in a UST-denominated “yield reserve” when the protocol makes more than 20% from borrowers and drawing down the yield shortfall from the yield reserve when it makes less.

Mirror Finance

Mirror is a DeFi protocol enabling the creation of synthetic assets called Mirrored Assets (mAssets) that mimic the price behavior of real-world assets like stocks or bonds. Mirror’s goal is to allow anyone to own and trade stocks in a permissionless manner. Users can mint mAssets by creating collateralized debt positions using either UST or other mAssets as collateral—similar to how MakerDAO borrowers mint DAI. The newly minted mAssets are synthetics representing fractional shares of real stocks such as Apple (AAPL) or Google (GOOGL) tradable on Mirror or TerraSwap.

Besides allowing users to mint and trade synthetic stocks, Mirror is especially attractive to liquidity providers because it provides relatively high-yielding market-neutral liquidity mining strategies.

Pylon Protocol

Pylon is a yield redirection protocol that builds on stable, yield-bearing protocols like Anchor. It allows users to make safe or retrievable deposits to pay for different services or invest in projects. Instead of risking capital and purchasing or investing in things with direct deposits, Pylon users can leverage Achor to redirect their yield towards any purpose they see fit.  

For example, instead of making a risky investment in a crypto startup through an Initial DEX Offering (IDO), Pylon users can make retrievable deposits whereby they only invest the yield instead of the principal. Instead of investing capital, users lock up yield-bearing capital and redirect the yield towards the investment. This way, users reduce their risk and the projects can still raise capital from a recurring revenue stream gained from the delegated yield. 

The protocol is maintained by various independent platforms and governed by holders of Pylon’s native governance token, MINE.

Spectrum Protocol

Spectrum is the first decentralized yield optimizer platform on Terra. It works similarly to other Ethereum-native aggregator tools like Yearn Finance, Vesper Finance, and Harvest Finance. Spectrum optimizes user’s yield farming by auto-compounding their rewards from various liquidity pools or other yield farming products built on Terra.

Spectrum’s current flagship product is the Vaults, where users can stake their assets and choose between two gas-saving strategies: auto-compounding and auto-staking. With auto-compounding, the vaults automatically increase the deposited token amounts by compounding the yield farming rewards back into the initially deposited liquidity pools. With auto-staking, the vaults automatically stake the rewards into the respective governance staking contracts.

Orion Money

Orion is an Ethereum-based protocol that integrates with Anchor Protocol on Terra via the EthAnchor cross-chain bridge. It allows Ethereum users to earn fixed interest rates on Ethereum-native stablecoins like wUST, DAI, USDT, USDC, FRAX, and BUSD. Behind the scenes, Orion exchanges these stablecoins for wrapped UST (wUST) and deposits them into Anchor Protocol for the Anchor UST rate. When users want to withdraw their deposits, Orion automatically reverses the process or unstakes the UST on Anchor, converts it into the desired stablecoin, and deposits it back to the user’s Ethereum wallet.

The current fixed yield rates on Orion range between 13.5% and 16.5% for different stablecoins, which is slightly below the 20% Anchor rate. However, the yield rates are among the highest offered for stablecoins on Ethereum. 

Other Forthcoming Projects

Besides the aforementioned projects, which are already functional and used by a significant number of Terrans, there are a few additional, highly-anticipated protocols currently in the works and scheduled for release by the end of the year. Alice, Spar Finance, Mars Protocol, Loop Finance, and Levana Protocol rank at the top of the list.

Alice is building a user-friendly mobile front-end application deriving fast payments and offering access to high-yield from DeFi protocols built on Terra. The product will primarily cater to non-crypto native users, allowing them to connect their bank accounts, purchase Terra currencies, earn high yields by leveraging Anchor, and spend UST using the project’s debit card.

Spar is building a decentralized active fund management protocol on Terra and Mirror. The protocol will allow money managers to show off their skills and retail investors to invest alongside them. Spar is aiming to offer casual investors returns that are usually reserved for private funds while providing professional investors with the ability to manage their own funds. 

Mars Protocol is building a money market for borrowing and lending on Terra. It’ll work similarly to how Aave or Compound work on Ethereum, only for Terra and Mirror assets on the Terra blockchain. 

Loop Finance, meanwhile, is building a decentralized exchange for trading Terra assets and NFTs. The project will launch a Chrome extension and mobile wallet application. 

Finally, Levana is looking to bring user-friendly leveraged products on Terra. Set Protocol has launched similar products on Ethereum, offering leveraged exposure to both ETH and BTC. Levana’s first product will be the Levana Leverage Index (LLI) token, which will represent 2x leveraged Terra assets tradable on any decentralized exchange on Terra. The first leveraged token will be the LUNA 2x-LLI, which will offer investors a simple way of acquiring leveraged exposure to LUNA without the risk of liquidation.

In conclusion, Terra’s ecosystem has quickly emerged as one of the strongest in the DeFi niche. Terra has successfully established its place in DeFi by focusing on stablecoins for real-world payments, and the projects on the network offer innovative alternatives to those found on Ethereum and other Layer 1 networks. As cross-chain interoperability begins to take hold, Terra’s DeFi network is well-positioned to see further growth in the future.

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