Why Terra enabling IBC Will Be a Game Changer!
Terra has passed a proposal to enable IBC on its blockchain - what does it mean for the Cosmos ecosystem?
Hey DEFI TIMES community,
Terra has passed a proposal to enable IBC on its blockchain.
This means that Terra will soon be able to seamlessly communicate with all other chains in the Cosmos network.
The Cosmos network is an ecosystem of 15 heterogeneous chains, which all talk to each other. Users can easily send tokens from one chain to another - using a technology called Inter Blockchain Communication (IBC).
Soon there will be 16 chains in the network when Terra joins the gang!
This could be a major event in the history of Cosmos. Why? Because Terra currently settles hundreds of thousands of transactions per second. Terra has a big ecosystem and this ecosystem will join the Cosmos network.
Let’s go through some Terra stats first.
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What is the Terra blockchain?
Let’s start and explore how the Terra blockchain works in the first place. Terra is a smart contract platform, which was developed by Daniel Shin and Do Kwon in 2018. It’s built using the Cosmos SDK and the Tendermint Delegated-Proof-of-Stake (DPoS) consensus mechanism. Currently, there are around 100 validators on Terra, but the number of validators is likely to increase to 300 in the future.
Terra is a special purpose blockchain, which means that it is specifically designed to be used in a certain way: The blockchain focuses on the creation of stablecoins but also has a native currency called LUNA. People use LUNA mainly for governance and utility.
However, the most interesting feature of Terra is the fact that the blockchain is designed to mint stablecoins. The flagship product of Terra is UST - a stablecoin that has seen significant growth. At the time of writing, UST is the 5th largest stablecoin on the market - with a market cap of $2.7 billion… not something you can easily ignore!
The minting of these stablecoins is inherently different from other stablecoins, such as Dai. Quick recap: You can mint Dai on MakerDAO by simply locking in collateral. Every Dai is backed by more than $1, which is how Dai can keep its peg to the dollar.
Stablecoins on Terra are not over-collateralized like Dai. UST uses an elastic monetary policy to ensure price stability and sustainable growth. It uses a dual token mechanism to keep UST pegged to the dollar. This sounds more complicated than it actually is. Let’s go through a simple example:
For UST to keep its peg to the dollar, two currencies are important:
To mint the stablecoin UST, you have to burn an equivalent amount of LUNA. So, imagine the current price of UST is $1 and LUNA’s price is sitting at $40. In that case, you have to burn 25 LUNA in order to mint 1,000 UST. On the other hand, if you want to mint 25 LUNA, you have to burn 1,000 UST → it works in both directions!
This concept is crucial for UST’s price stability. Arbitrageurs make sure that UST keeps its peg. When UST is below $1, arbitrageurs will burn one UST to get $1 worth of LUNA. When UST is above $1 dollar, they will burn $1 worth of LUNA to get one UST.
That’s how we can be sure that UST is always worth $1 - even though it is not over-collateralized. LUNA is a volatility absorption tool, also capturing rewards through seigniorage and transaction fees.
What Happens When Terra Enables IBC?
When Terra enables IBC, the blockchain will connect to all other chains in the Cosmos network. Users will be able to seamlessly transfer Terra-based tokens to the Cosmos Hub, Osmosis, etc.
This could set free an incredible amount of liquidity to move freely across IBC-compatible chains.
Every single asset sitting on Terra can easily be transferred to all other chains in the Cosmos network.
What happens when $2.7 billion worth of UST will be set free?
The free market will decide where they are best allocated. For example, part of that liquidity could go into Osmosis pools to earn trading fees and liquidity mining rewards.
Right now, there are just over $400 million staked in Osmosis pools. What happens when UST holders realize they earn hundreds of percent per year simply by staking stablecoins?
UST is just one of the hundreds of coins that are waiting to be released!
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IBC is a Positive-Sum Game
IBC will bring lots of additional benefits to UST holders. The blockchain space is not a zero-sum game… it’s positive-sum!
The fact that Terra will enable IBC will benefit both Terra and all other IBC-compatible chains - all parties win here! It’s a network effect that is in favor of all participants.
The utility of the network rises exponentially with each new zone entering the network.
Quick example, imagine two states of the Cosmos network.
1,000 connected chains
10,000 connected chains
Under normal conditions, you would expect 2) to be worth tens times more than 1). However, this couldn’t be further from the truth. 2) is exponentially worth more than 1). It’s the power of the network effect that you shouldn’t underestimate.
Terra is set to enable IBC, which will connect it seamlessly to all other chains in the Cosmos network. This will have a huge impact on the Cosmos ecosystem because Terra is one of the largest blockchains out there.
UST alone has a market cap of $2.7 - not something that is easy to ignore.
It’s safe to say that Terra won’t be the last chain, which enables IBC.
This is only the beginning of the internet of blockchains.
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DISCLAIMER: All information presented above is meant for informational purposes only and should not be treated as financial, legal, or tax advice. This article's content solely reflects the opinion of the writer, who is not a financial advisor.
Do your own research before you purchase cryptocurrencies. Any cryptocurrency can go down in value. Holding cryptocurrencies is risky.