Wednesday, December 2, 2020
Home The Capital Terra: The Cosmos DeFi Hub

Terra: The Cosmos DeFi Hub

In essence, Chai is a payments app with some key differences that make it a one of a kind product.

The first one is that, given that it was the first (and up until now the only) app built on top of Terra, it has been the sole benefactor of the seigniorage subsidy allocated to dapps within the Terra ecosystem. This subsidy has been intelligently used by Chai to bootstrap their network by offering discounts and cashback to users making purchases through the app.

The other key aspect that makes Chai unique is that it uses the Terra blockchain (and Terra stablecoins) to settle payments between users and merchants. This has some important benefits for merchants. First, they pay a much lower settlement fee for every transaction compared to traditional payments processors. While Terra currently charges 0.574%, traditional payments processors charge around ~2.5%. The other important benefit is that, while traditional payment settlements can take up to two weeks to clear up, with Terra payments settle within seconds.

Both these aspects (coupled with a seamless and beautiful UI) have made Chai a success. Within a bit more than 1 year, the app has been able to garner impressive traction: it now boasts more than 1.9 million users, ~1 million USD in daily transaction volume and more than 30 stores (including some of the biggest e-commerce players in Korea).

Although these numbers are outstanding by themselves, to me, the most impressive metric is the fees generated by the app. In an analysis made by Lasse Clausen from 1kx, from January to April of this year, the total fees generated on Terra (mainly by Chai) stood as the third largest among all blockchains, only behind Bitcoin and Ethereum. The following graph comes from that analysis.

Figure 2. Blockchain Transaction Fees in 2020. Source.

Year to date, Terra has generated more than $5 million in fees. To put that into perspective, during the same period of time Bitcoin has generated ~ $157 million in fees. That means Terra is generating 3.4% as much fees as Bitcoin; an impressive feat for a Blockchain that’s only been around for 17 months.

Now, as a PoS blockchain, these fees represent cash flows generated by Terra, which accrue to Luna holders (via validating or delegating). At a rate of ~$7 million in annualized fees and a fully diluted market cap of ~$300 million, that would imply a P/S ratio of ~43 and, given validator commissions between 1 and 20%, a worst-case P/E ratio for delegators of ~53. There have been some really good valuation analyses by Hashed and Maple Leaf Capital that put these numbers into context, so it’s not worth repeating that here (but I highly suggest you check them out).

Something that’s worth noting regarding those fees, as Cristopher Heymann suggests, is that “after being live now for [only] 17 months on mainnet, Terra has established itself as an attractive source for non-dilutive revenue for validators.” What this means is that, as opposed to other blockchains (or dapps) where staking income comes mainly from inflation, Terra offers validators (and delegators) a source of income that comes from fees paid by real-world merchants using the payments network. In this analysis, Daniel Hwang explores the importance of this dynamic for network security and valuation.

Now, Chai may also face some challenges going forward. As network growth naturally slows down (it’s still early though), seigniorage will decrease and discounts will have to be reduced. However, the team is aware of this and is already working on some alternatives to make the platform stickier. One of those, which I find interesting, is shifting focus from discounts to cashback (which are given in Terra stablecoins), thus achieving two goals: 1) Making users come back to the platform as they’ll have some money parked in their account; and 2) Reducing money velocity, thus increasing seigniorage. These efforts seem to be working quite nicely, as user retention data shows (see Figure 3).

Fugure 3. 1-Month User Retention Rate. Source: Terra.

Additionally, it is worth noting that Chai is still relatively small and may still have ample room for growth. At the same time, other initiatives such as the Chai card (which will go global soon) and Chai’s expected SEA expansion, will probably keep propelling network growth.

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