There’s no shortage these days of blockchain-based projects to build or develop a digital version of U.S. dollars: private efforts including tether, USDC, diem, dai and the Federal Reserve’s research into whether to issue a central bank digital currency. But one project, Terra, appears to be outperforming the rest – at least based on the issuer’s governance token price so far in 2021. 

Terra is a three-year-old project from the South Korean developer Terraform Labs, built to support a basket of decentralized stablecoins. Demand has surged in cryptocurrency markets for Terra’s LUNA token, which works as part of an automatic balancing system that helps to keep prices for the stablecoins, well, stable.

The LUNA price has climbed a flabbergasting 25-fold this year, outpacing the already-impressive sevenfold gain for larger rival MakerDAO’s maker tokens. LUNA’s market capitalization has jumped to about $6 billion from $300 million in less than five months, overtaking MKR at $4.7 billion.  

Cryptocurrency analysts see value in Terra’s two current major use cases: Mirror protocol, which allows users to create tokens that track the price of real-world assets like stocks, and Anchor protocol, a lending and saving platform. Both protocols make use of Terra’s own stablecoins such as TerraUSD (UST), which is pegged to U.S. dollars, and TerraKRW (KRT), which is pegged to the Korean won.

LUNA serves as a governance token and is used as part of an algorithmic balancing system that helps the stablecoins maintain their pegs. For example, when TerraUSD trades above $1, users can send $1 worth of LUNA to the system and receive 1 UST in return – a trade that helps to bring the stablecoin’s price back in line.

The combination of Anchor and Mirror creates “a flywheel that effectively retains and grows monetary inflows,” Messari analyst Phang Jun Yu wrote May 6 in a report. 

“When the market is bullish, users will turn to equities and start using Mirror,” he wrote. “When the market is bearish and people are wary of investments, they turn their assets back into cash and deposit it into Anchor.”

Stablecoins – whether centrally managed versions like tether and USD coin, or decentralized versions like dai that are managed by blockchain-based protocols – have proven popular assets in digital-asset markets, as alternatives to major cryptocurrencies like bitcoin and ether, whose prices can be volatile.

An emerging subcategory is “algorithmic stablecoins” like Fei Protocol (FEI), which use software-coded procedures embedded into the protocol to maintain the currency peg. While some of these projects have encountered mixed success with keeping the peg at an on-target reading of 1-to-1, proponents say they have advantages.

“The advantage you get with algorithmic stablecoins is that nobody can take that away from you and it retains all the censorship-resistant properties of bitcoin,” Terraform CEO Do Kwon told CoinDesk in an interview. 

Of course, it’s important to note that prices for newer cryptocurrencies like Terra can be extremely volatile, and these decentralized blockchain-based protocols have short track records and can be prone to glitches and snafus. Fei’s recent difficulty keeping its stablecoin at a 1-to-1 peg might be seen as a cautionary tale.

Kwon said that some algorithmic stablecoin projects are struggling because they failed to recognize the importance of mainstream adoption and limited their projects' use cases – such as staking the stablecoins to earn rewards.

“These protocols don’t natively print stablecoins to incentivize the users to hold, which would be like a recursive incentive,” Kwon said.

Since the UST dollar stablecoin was first minted in December, the amount outstanding has climbed above $2 billion, according to CoinGecko. While that’s still a fraction of tether’s $58.5 billion, it’s not too far behind the $4.6 billion for two-year-old dai. 

Kwon said the rapid value growth of UST is backed by the success of protocols like Mirror and Anchor. 

At least 50 different protocols have announced plans to support the Terra-backed stablecoins, including an options protocol on top of Mirror.

“For the next six months, what we are going to be focusing on is to make sure that these new projects that are launching are successful and then sort of help to compose them into use cases leveraging our existing assets,” Kwon said.