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 Let’s imagine Terra is a modern day bank (ie glass-stegall has been repealed).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