The Investor’s Guide to Terra and Luna

  • More reward usually comes with lots more risk.
Remember that “Terra” means “Earth,” as in “plunging back to Earth.”

Terra and Luna: How They Work

Terra is a family of stablecoins, designed to hold their value against traditional currencies (if you’re new, read our Guide to Top Stablecoins).

  • When TerraSDR’s price > 1 SDR, users and arbitragers can send 1 SDR’s worth of Luna to the system and receive 1 TerraSDR.
This is how most algorithmic stablecoins maintain their peg: through another token that acts as a “balancer.” (Courtesy The Tie Research)
Remember: with stablecoins, we want the flattest line possible.
The idea is that Terra is stable, Luna is speculative.

Terra/Luna Risk #1: Algorithmic Stablecoins

All stablecoins are “backed” by something. There’s something in the “vault,” whether that’s actual dollars (good), other crypto (risky), or some combination of stuff (even riskier).

Remember: flat line = good, wavy line = bad
Here’s an idea: don’t build a stablecoin on something called WAVES
  • Any algorithmic stablecoin that relies on arbitrage traders to maintain the peg can collapse during a crisis.
  • During periods of panic, algorithmic stablecoins have information asymmetry: even crypto “oracles” can break down, so no one knows the true price.
Don’t look up.

Terra/Luna Risk #2: High-Yield APYs

Let’s set aside the algorithms, and just use some common sense. If you buy Terra, lock it up in Anchor Protocol, and start earning your 20% APY, where is that money coming from?

Terra/Luna Risk #3: New Blockchains

Terra/Luna Risk #3: New Blockchains

Remember: Terra is not built on Ethereum, like the majority of DeFi projects. It’s a separate blockchain, which means it does not have the network effects that we constantly preach.

Conclusion: The Risks Outweigh the Rewards

Investors in Terra stablecoins (and, by extension, the LUNA token) are taking on three separate levels of risk:

  • The risk of high-yield APYs, which usually come crashing down to Earth;
  • The risk of a new blockchain, which is young and unproven.

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