We all know Tether, the largest stablecoin today, is a ticking time bomb. No one really knows how much of the $78 billion market cap is backed by real US Dollars. Even USDC, the second-largest stablecoin, is getting closer to being regulated and eventually replaced by a US government-issued digital dollar. This means all centralized stablecoin owners will need to be identified and go through KYC. In essence, this not only defeats the purpose of Web 3 (having a permissionless and decentralized economy), but it would also break DeFi as we know it today.
This leads me to believe we will continue to see strong growth for decentralized stablecoins such as TerraUSD (UST) in 2022. UST is now the largest decentralized stablecoin, after growing its market cap from $200 million at the start of 2021 to an astonishing $10 billion today. In 2021, we also saw Terra become the second largest blockchain as measured by Total Value Locked. Currently, Terra only trails Ethereum, after surpassing Binance Smart Chain, Solana, and Avalanche. More impressively, it accomplished this with only 14 protocols in the ecosystem compared to Ethereum’s 376 and Binance Smart Chain’s 255. With more projects expected to launch in 2022, including Alice, which lets users spend money and earn 20% interest without having to go through the hassle of DeFi, it is reasonable to predict UST will get an even greater adoption.
Anyone who believes the Terra Luna run is over because of the price action we saw in 2021 (going from $0.63 to $89), is clearly missing the bigger picture here. Unlike many crypto projects where the price of its token has no real correlation with its ecosystem, Terra Luna actually has strong tokenomics (supply and demand of a token).
For example, if you consider Cosmos (Terra is built on the Cosmos SDK), whether the price of its token, ATOM, will appreciate in value is extremely difficult to predict. For one, it’s inflationary, meaning there is no limit to the number of ATOM tokens that could be minted. Additionally, a user does not need to buy or own any ATOM to participate in the Cosmos ecosystem. Although I’m bullish on Cosmos, the poor tokenomics means that ATOM’s price is purely determined by investors’ perceived value, something I would not bet on during a bear market.
In the case of Terra, the price of Luna is directly influenced by an increase or decrease in user adoption of the UST ecosystem. This is because when there’s more demand for UST, a corresponding amount of Luna tokens gets burned to keep the peg, decreasing the overall token supply of Luna. This is the basics of Economics 101, price increases when supply decreases. Hence, if you are in the camp that believes UST adoption will continue to grow, Luna will benefit from its tokenomics alone, even without interest from investors. By the end of 2022, my prediction is Luna will be a top 3 crypto by market cap, or in the worst-case scenario, a top 5 crypto.
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