Terra is a law-breaking bank

Came up with a banking analogy to describe Terra. Let’s imagine Terra is a modern day bank (ie glass-stegall has been repealed). Terra is essentially a bank that uses 100% of its customer deposits to invest in its own stock!

1/ Bank receives customer deposits

2/ Bank uses 100% of those customer deposits to invest in its own stock

3/ Bank’s stock price will now increase in proportion to the volume of customer deposits.

4/ Bank offers a 20% interest on customer deposits. This interest rate is funded by the bank issuing new shares of its own stock and selling them for dollars, which are then passed to depositors as 20% interest.

5/ 20% interest rate attracts a HUGE volume of customer deposits. This causes the bank’s stock to go to the moon!

6/ As long as the market cap of the bank’s stock increases faster than the volume of customer deposits, the bank is able to keep operating with 20% interest rate, growing deposits and growing stock price.

7/ If, however, the deposits increase faster than the market cap of the bank’s stock, then Eventually the deposit volume will become bigger than the market cap of the stock. When this day comes, the bank will become insolvent. And of course , when a bank becomes insolvent, there will be a bank run and the bank will collapse.

Addendum: detailed explanation of the terra as bank analogy
– terra blockchain is the banks payment processor (albeit one that only works for transactions between internal deposit accounts at the bank)
– UST is a zero interest deposit account product
– LUNA is the banks publicly traded equity
– Anchor is a high interest savings account product

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20 thoughts on “Terra is a law-breaking bank”

  1. 4 is not entirely true. That stock is being distributed as a gift from terra from their own funds as well as any revenue generated from transactions. These are not “new” shares as there’s no inflationary printing of Luna.

  2. I think you mean Anchor. UST is a stablecoin and doesn’t increase in price and Terra is a blockchain which doesn’t boast a 20% APY.

  3. Your analogy is not correct. Seems like you don’t understand how it all works. So let me explain.

    Customers can deposit UST to earn savings or deposit collateral like bLuna, bETH, bAtom, wasAVAX, etc., to borrow UST. When customer borrows, Anchor earns interest from that. Anchor is also earning staking rewards from that collateral. It uses that interest and rewards (plus some funds from reserve) to pay the customer their savings rate. Anchor is not buying its own stock (Anchor token), or the Luna token (Luna token is deflationary).

    You seem to be confusing Anchor and Luna as the same. Anchor is just one of the products which benefits Luna. Luna’s growth depends on more people using UST. UST is now supported by various chains and protocols, and stuff like the 4pool and the BTC/AVAX reserves are only making its growth stronger.

    Think of Anchor like a marketing spend for TFL to get people into the Terra ecosystem. Once people see the ecosystem, they realise how good it is with its low fees. They realise that even when Luna moons, they can continue to have low fees since this chain can pay fees in stablecoins (UST), and not necessarily in the expensive native token (Luna). This is unlike any other chain right now. They realise this ecosystem is a closed loop with a savings account in Anchor, a good spending option via stablecoins (UST), and great growth holding coin in Luna. And this is before mentioning any of the defi stuff the ecosystem has.

    DAI on the other hand is backed partly by USDC which is a centralised stablecoin, meaning it can be frozen. DAI can’t really call itself decentralised when it is collaterised by a centralised coin.

  4. eventually the APY may taper off and people will leave and there will be a rebound. UST has depegged before to as low as $.77 if I remember correctly from previous market black swan events.

    I would liken it to…musical chairs in a way. it can be bank-ran, but a lot of stablecoins and custodial services (like Celsius, Nexo, BlockFi, etc.) can get bank ran as well.

  5. These are valid concerns, but let me point out that I think you are a little off the mark with no. 7.

    >Eventually the deposit volume will become bigger than the market cap of the stock. When this day comes, the bank will become insolvent.

    If Terra was a bank it would be a *central bank*, and a central bank cannot become insolvent in its own currency.

  6. Ultimately all crypto (except may be some stablecoins) derives fake value from tokenization: from printing tokens out of thin air. Just like central banks today print money out of thin air. The only solution to this is may be to use commodities or their pure digital versions as money.

    In the meantime, its about how we can manage risks.

  7. Nobody gives a shit about banking laws in defi, that’s why we’re in defi. You should choose a different way of getting your point across than appealing to the law.

  8. This is what happens when people in crypto try to explain things in a way they think a normie would understand. Spoiler alert: no one in crypto can communicate to a mainstream audience.

    My eyes rolled back half way through this.

  9. It’s obviuosly a Ponzi with that high APR. Contrary to popular crypto believes, you cannot print imaginary fiat out of thin air.

  10. ATM we’re incentivized to use the protocol cuz they are pouring money from the treasury to protect the stable % yield. At some point the money in the treasury will either decrease or increase. Since LFG is buying btc to back luna which defends the ust peg I’d bet the treasury will slowly but surely increase.
    P.S: Bankruns are fun, only if you’ve got a headstart or you’re just spectating 🙂


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