The Ultimate DeFi Introduction: Part III/III

The last article of the series is here! If you’re new here and wonder what DeFi is, head over here and check out the entire 4 part series.

Before we start, I want you to think of your DeFi journey thus far like setting up a new computer. We covered how blockchains work, which is similar to how a normal operating system works, like your Apple or Windows. You can then build applications on top of it — just like Facebook or Twitter — but for blockchain, with smart contracts.

We also proceeded to dissect what makes up DeFi last week. It’s similar to how you have different computers suited for various applications, such as gaming or work. To put all of these in a picture, here’s how it looks:

Today we’ll actually set up a “computer” that’s catered to you. Your own DeFi strategy.

In this article, we will go through:

1. Introduction to Terra
2. How to set up your exchanges and Terra Wallet
3. Core Terra dApps and some basic strategies
4. Overview of other Terra dApps

Introduction to Terra

Which ecosystem is the best for DeFi?… Well, let me introduce you to Terra.

Before even researching Terra, I stumbled upon Anchor and got intrigued because Anchor could provide a stable 20% APY. I then decided to put some money into it. As I researched more into Terra — the relationship between LUNA and UST, how Mirror works, and how Anchor is able to maintain its 19% to 20% APY — I knew I had to put more into the Terra ecosystem immediately.

To me, Terra felt like the “Apple of DeFi” at that point in time, and still rings true to me today.

Apple of DeFi?

Now, I’m sure most of you guys know people who use Apple products on a daily basis and are fanboys… or maybe you are one yourself. The question is, why do they still use Apple even though Apple’s hardware and software aren’t the most unique of all?

Well, the answer to that is: “it just works”. The experience of using Apple products is dead simple. It’s smooth and seamless to move things between different devices. You can make notes on an iPad, finish it on your MacBook and send it to your iPhone within seconds.

That’s how the experience for DeFi on Terra is.

Ask anyone who has ported over to Terra and experienced DeFi on Ethereum, if they would go back to Ethereum. The answer is a resounding ‘no’.

So ser, what is Terra?

If you head over to their website, Terra only has one aim: To make money programmable. This concept essentially means that Terra aims to remove central entities by allowing money to be programmed via smart contracts.

Terra has a native token called LUNA, and an array of other stablecoins such as UST (which we will be using for the most part).

The relationship between LUNA and its stablecoins

Remember, the whole point of decentralized finance is so that finance is made fair to everybody by removing the need of having central entities. Not only that, but for decentralized finance to be accepted by the masses, people need to be able to transact in a stable cryptocurrency.

However, most of DeFi are either using stablecoins that are proxied by central entities or using cryptocurrencies that are not stable. Terra solves all of this by introducing LUNA and it’s host of stablecoins which are both stable, and censorship resistant.

Terra’s native token — LUNA — simply acts as a price stabilizer for its stablecoins, such as UST (pegged to US dollars), KRT (pegged to Korean Won), and many more.

To simply explain how the mechanisms work, if the price of UST > $1 USD, the algorithm will burn LUNA to mint more UST, hence putting UST back to $1 USD (supply & demand). The reverse is also true.

How to set up your exchanges and Terra Wallet

Now the fun part… trying it out for yourself!

To be really honest, we definitely have been talking a lot regarding technicalities the past few weeks and I feel you should experience it for yourself… so let’s start! First, you need to open up your Kucoin account. If you don’t have one, feel free to use my referral link here!

Getting your UST on Kucoin

For ease of use, I will start off by buying USDT using my credit/debit card. But do note that there will be some fees incurred. If you wish to do so, you can get USDT on other exchanges first — native to your country with lesser fees — and proceed to transfer the USDT to Kucoin.

After you have gotten your USDT, you want to proceed to spot trading.

Then, click on the BTC/USDT pair and type in “USDT”. Find USDT/UST, and click on that.

Last but not least — to get UST — go to the bottom right, click market, and put 100%.

Phew… that took some time, didn’t it! Next up, we’ll set up your Terra Wallet and then transfer your UST from Kucoin to your Terra Wallet.

Setting up your Terra Station Wallet

To set up your Terra Wallet, you need either the Terra Station Desktop Application that can be found over here, or the Chrome Extension which can be found here.

After installing either the application or chrome extension, click on “New Wallet”, and type in your wallet name and password.

It doesn’t matter what you put as the name, and for the password, this password will be used to confirm transactions/transfers on your computer.

One important thing to note is to memorize/write down your seed phrase and store it somewhere safe. Never ever give it to anyone as this seed phrase allows anyone to access your wallet.

Once you are done, you should be welcomed with #3.

Your personal address is the one that starts with “terra…..” and this address is the address that represents you in the blockchain. You can give this address to people if you want them to transfer tokens to you etc. Think of it as your bank account number.

For now, copy this address by clicking the button next to the QR code logo.

Moving your UST to Terra Station

For this part, you can head back to Kucoin after copying your terra address.

In Kucoin, click Assets, and then click Withdraw on the right side. Once you are there, click on the middle and search for “UST”.

Input your copied address from Terra Station, and put it under “Wallet Address”. For your network, pick “Terra”. Then put the desired amount you want to withdraw from Kucoin to put in your Terra Station Wallet.

Once you are done, click confirm and follow the on-screen instructions. Your funds should be transferred within a few minutes after confirmation.

Core Terra dApps and some basic strategies

I have some UST! But… now what?

Let’s start off by looking at basic strategies to maximize your yields. Although for now the strategies are basic, I will post more strategies in the future. For now, here are the 2 strategies you can implement, that we will cover today:

1. New to Terra (Safest)
2. Exploring Terra in-depth (Riskier)

New to Terra: Strategy

This first strategy is catered for people who are new to Terra. We will be using Anchor Protocol for this strategy.

This strategy doesn’t involve any form of active risk management & is able to give you a good yield higher than any TradFi instruments… and safe to say, even higher than investing in the S&P 500 Index Fund!

Ser, what Anchor?

Anchor is basically a hybrid savings/money market that allows people to borrow and lend UST, for the uninitiated. The difference with Anchor as compared to products like Aave is that Anchor only accepts liquid staking assets as collateral, which produces bulk of the income for depositors (you and me).

First: Deposit UST on Terra Station (from Kucoin)

Since you already have UST on your Terra Station, we can head on over to https://app.anchorprotocol.com/earn.

Second: Deposit UST on Anchor for aUST

Here, our first step would be to click “connect wallet” on the top right side.

P.S if you were wondering how to view Anchor in Dark mode, you can click on the sun/moon icon on the bottom right!

After you are connected, click on deposit just under “Earn”.

Then, a “deposit” feature should pop up. Type in the amount you want to deposit and click proceed. Remember to keep around 8 UST for transaction fees.

Once you click “proceed”, there will be a confirmation pop-up from your Terra Station Extension.

Type in the password you inputted when you first created the wallet, and confirm!

Once you are done, Anchor will then give you a receipt to confirm your deposit. In your wallet, you will also see aUST now instead of UST.

And that’s it! You’re earning 19 to 20% APY on your UST.

If you want to learn more about Anchor in-depth (eg. learn about how Anchor is able to maintain 19 to 20% APY), take a look at my medium post that explains the intricacies of Anchor Protocol.

New to Terra: Risks

Before moving on to the next strategy, I also want you to be aware of the risks involved. For this strategy, there are only 2 risks involved:

1. UST depegging
   Based on historical values, UST has only been off peg on the May 19 week. Ever since they implemented a fix for that, UST has been strong and on peg. To mitigate this risk, you can also grab a UST depeg insurance from https://unslashed.finance/.
2. Smart Contract Hack
   Regarding Smart Contract hacks, although Anchor places an utmost importance in security, there might be a chance that hackers find some new loophole. Thus far, Anchor has NOT been hacked before. To mitigate this, you can grab an insurance either from https://www.insurace.io/, https://nexusmutual.io/ or https://www.bridgemutual.io/

Exploring Terra in Depth: Strategy

Now for this strategy, we are going to explore another application called Mirror and learn a little bit about sLPs. Essentially, this strategy is an extension of our first strategy.

Ser… now what is Mirror?

For the uninitiated, Mirror Protocol is basically a platform on Terra that allows you to purchase stocks anywhere, anytime. Note that stocks on Mirror are not 1:1 backed by real stocks hence it’s not a tokenized assets, but rather just mirrored assets.

First: Deposit UST on Anchor Protocol

This step is the same as the “New to Terra” strategy. If you don’t know how to execute it, scroll up a little bit to check it out.

Second: Find “Short Farm” mAssets in Mirror

Now that you have aUST in your wallet, you can head over to https://terra.mirror.finance/ and connect your wallet.

Then, find “Farm” on the left, and scroll down or search for mIAU. Once you’ve found mIAU, click “Short Farm”.

Third: Use aUST to short farm mIAU

After clicking it, you will be redirected to the farming screen. On this screen, change your collateral asset to aUST, and set your collateral between 205 to 210% (what I feel is safe, but you can increase/decrease based on your risk appetite)

After you click farm, this is what will happen:

1. Mirror Protocol will take the aUST from your wallet
2. The aUST taken will be used as collateral to borrow stocks from Mirror Protocol and sold immediately (so for example, if you put $1,000 worth of aUST and set your collateral ratio at 200%, you will get $500 worth of stocks — in this case, mIAU — which is then immediately sold off for UST [for ref: 500 UST])
3. This 500 UST will then be available to you after the locked period of 2 weeks. After 2 weeks, you can choose to put the UST back into Anchor Protocol and keep your short open.

Ok ser, how do I close my position?

To close your position, you need the equivalent amount of stocks. For example, if you borrowed 2 mIAU (which was immediately sold off for UST and is locked for 2 weeks), you’d need to buy 2 mIAU first before you are able to close off your position.

Am I still earning on my aUST?

Yes you are. The way UST & aUST works is that aUST will appreciate overtime, at a premium of 19–20% per year. So if you have 200 aUST worth $100 today, next year your 200 aUST will be worth $120.

This also means that the value of your collateral (aUST) increases over time.

So assuming that mIAU has a yield of 15% on average, you will be earning an extra 15% on top of your 20% on UST.

Exploring Terra in Depth: Risks

Now because this strategy involves collateralization, this is definitely a bit riskier than the first one. Here are the risks involved:

1. UST depegging
   Based on historical values, UST has only been off peg on the May 19 week. Ever since they implemented a fix for that, UST has been strong and on peg. To mitigate this risk, you can also grab a UST depeg insurance from https://unslashed.finance/.
2. Smart Contract Hack
   Again, because everything is run on smart contracts, there is still a chance that either Anchor or Mirror gets hacked. For Anchor, you can purchase insurance from https://www.insurace.io/, https://nexusmutual.io/ or https://www.bridgemutual.io/. However for Mirror, there is no insurance available yet, but the team definitely places utmost importance on security.
3. Liquidation of mAsset
   For this, the reason why I chose mIAU is because it has the least volatility of all. Assuming you borrowed $500 worth of mIAU at $15 per share, mIAU would need to go to $30 for you to get liquidated. However, mIAU’s deviation has only been +/- $4 to 5, meaning you can open this farm and stay hands off until you decide to close it.
4. Purchase Loss Risk
   Now, remember, since this is a sLP (short liquidity pool) and your borrowed UST is locked up for 2 weeks, the best-case scenario for you would be if the asset you shorted drops in value. Here’s an example: Let’s say today you buy $450 worth of mIAU at $15 per share — giving you 30 shares — and the price increases to $20 per share after 2 weeks. The UST you have from shorting the asset was only $450, but since mIAU is now trading at $20, you’ll need $600 (30 shares x $20) to cover your short farm. This is purchase loss risk. To mitigate this risk, you should keep the farm for as long as possible, or, if you have extra UST, buy the stocks immediately after short farming it.

Overview of other Terra applications

Is this all I can do on Terra?

I hope this guide has given you a good knowledge about core Terra applications and have set you up on your journey into DeFi. However, there are some other applications I also want to cover here which you are free to explore and research on during your free time!

Pylon Protocol

Pylon Protocol is a platform for lossless investments. In normal investing, you’d have to trade your starting capital upfront, and in return you’ll get back a number of tokens or stocks.

However, for Pylon, you are able to invest without any capital loss. The way it works is that your capital is deposited into Anchor, and only the yields are used up to purchase the tokens/stocks in return. The only tradeoff is the time value of money, as your capital will be locked up for a set number of months.

Let’s say you want to invest $1,000 into a project at $0.25 per token, and the agreed timeframe is 6 months cliff and no vesting. Your $1,000 will be locked up for 6 months and deposited into Anchor. Assuming Anchor is at 20% APY, only the yields ($100) will be used to purchase the tokens & at the end of 6 months, you are able to withdraw your initial capital of $1,000 and $100 worth of tokens bought at $0.25 each.

Spectrum Protocol and Apollo

These 2 dApps— Spectrum and Apollo — are yield aggregators. Yield aggregators allow you to maximize your APR while not having to interact with 20 different applications, and all the various farms/yields are unified on their respective platforms.

However, this is a little riskier because you are exposed to this concept of Impermanent Loss. To read up more about Impermanent Loss, check out this article.

Conclusion & What’s next

This wraps it up!

So this marks the end of our first series. I hope you guys have learnt something new from this, and are getting started (and excited) for your DeFi journey! Our next series will be targetted towards trading, and how to actually price crypto projects, as nowadays social media is super noisy.

If you’ve enjoyed this series, do consider following me on Medium.

If you have any discrepancies with this article, feel free to shoot me a DM or message me. Not financial or legal advice, do consult a financial professional before you decide to make a serious financial investment!

This is the last out of four of the DeFi introductory series! If you want to stay updated and read my other articles coming up in the future, follow me on Twitter!