Terra’s LUNA Passes Ether As Second-Largest Staked Asset

What Is Terra?

Terra bills itself as a next-generation blockchain payment network interwoven with stablecoins and powered by its native LUNA token. In technical terms, Terra is a layer-1 blockchain protocol with smart-contract functionality that works as a payments-focused fintech ecosystem leveraging algorithmic stablecoins, the stability of whose value is maintained by internal algorithms. 

The white paper for the Terra blockchain was released in April 2019, the same month its mainnet was launched. The document describes Terra as a price-stable, growth-driven stablecoin that achieves price stability via an elastic money supply, enabled by stable mining incentives. The protocol also uses seigniorage — the profit made from issuing currency — to stimulate transactions and facilitate wider adoption.

The protocol has issued stablecoins pegged to the U.S. dollar, the euro, the Chinese yuan, the Japanese yen, the British pound, the South Korean won and the International Monetary Fund’s special drawing rights, an international reserve asset that supplements the currency reserves of the multilateral lender’s member nations. They are all collateralized by the LUNA token, with TerraSDR being Terra’s flagship currency. Terra’s main stablecoin, Terra USD (UST), aims to reduce the volatility associated with cryptocurrencies such as Bitcoin and Ethereum. 

Terra USD is secured not by U.S. dollars, but only by smart-contract algorithms and the LUNA coin. By contrast, USDT, the biggest stablecoin by market capitalization, had been touted by its operator, Tether, as being backed by U.S. dollars. When it was discovered that USDT was backed mostly by assets such as commercial paper, certificates of deposit and U.S. Treasury bills, Tether was fined US$41 million for having made misleading claims about its reserves.

Terraform Labs nevertheless hopes that its tokens’ fiscal foundations, paired with the protocol’s elastic monetary governance, will drive widespread adoption. Terra’s fiscal governance and spending regime are managed by a treasury that acts in a manner similar to a central bank. Community members can submit proposals that compete for stimulus programs, the proposals are vetted and voted upon by the rest of the ecosystem, and those that promise the highest level of adoption are approved.

Terra: These are stablecoins that track the price of fiat currencies and are named after them. For instance, the base Terra stablecoin tracks the price of the IMF’s Special Drawing Rights and is named TerraSDR or SDT. Other Terra stablecoin denominations include TerraUSD (UST), which tracks the U.S. dollar, and TerraKRW (KRT), which tracks the South Korean won. Users mint new Terra by burning Luna.21

 

Luna: Used for governance and mining, Luna is the Terra protocol’s staking token that absorbs the price volatility of Terra stablecoins. Users stake Luna to Terra blockchain miners (called “validators”), who record and verify transactions on the blockchain and receive rewards from transaction fees as compensation. As usage of Terra grows, Luna’s worth increases as well.

What Makes Terraform Special?

This year, the concept of decentralized finance—or DeFi—exploded on the scene. Such a system would be built on a vast network of blockchain technology, and Ethereum—which has its own token, ETH—is currently the leading blockchain platform. But other developers have emerged to challenge Ethereum’s dominance, giving rise to platforms like Solana and Avalanche, both of which have engineered blockchains that claim to have faster processing and fewer energy costs than Ethereum. Industry analysts call these competitors “Ethereum killers,” which are attacking problems Ethereum has yet to solve, such as transitioning to proof-of-stake protocols over proof-of-work for crypto mining.

Luna’s base, Terra, is another such killer, with its own blockchain network designed to temper the infamous volatility of cryptocurrency assets. Terra uses algorithms to generate stablecoins, or cryptocurrencies whose values are stabilized by pegging them to external assets, such as fiat currency or gold.

Who Are The Founders Of Terra?

Terra was founded in January 2018 by Daniel Shin and Do Kwon. The two conceived of the project as a way to drive the rapid adoption of blockchain technology and cryptocurrency through a focus on price stability and usability. Kwon took on the position of CEO of Terraform Labs, the company behind Terra.

Prior to developing Terra, Shin co-founded and headed Ticket Monster, otherwise known as TMON — a major South Korean e-commerce platform. He later co-founded Fast Track Asia, a startup incubator working with entrepreneurs to build fully functional companies.

Kwon previously founded and served as CEO of Anyfi, a startup providing decentralized wireless mesh networking solutions. He has also worked as a software engineer for Microsoft and Apple

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Expansion (Of The Terra Pool)

When Terra is trading at a price that is high relative to its peg, the implication is that demand for the stablecoin is higher than supply; this means that supply of Terra should be increased to match demand. The protocol incentivizes users to mint Terra and burn Luna, which has the effect of lowering the Terra price (through expanded supply) and increasing the Luna price (by reducing its supply). Users continue this arbitrage process until Terra trades at its target peg price.

Contraction (Of The Terra Pool)

The reverse situation occurs when Terra is trading at a price that is low relative to its peg, which implies that there is more supply for the stablecoin than demand. This would necessitate reducing the supply of Terra until it matches demand. The protocol then incentivizes users to burn Terra and mint Luna, which has the effect of boosting the Terra price (through reduced supply) and lowering the Luna price (by increasing its supply). This arbitrage process is continued by users until Terra trades at its target price.

Terra-Luna Ecosystem

In its quest to become a leading ecommerce stablecoin payment and decentralized finance (DeFi) service provider, Terra has a growing ecosystem in the crypto space with more than 70 projects across DeFi, Web 3.0, and non-fungible tokens (NFTs). These projects include:

 
  • Anchor Protocol: A fixed yield platform with borrowing yields and frictionless access
  • Andromeda Protocol: Next-generation NFT protocol
  • Chai: A payments app with over 2 million users in South Korea
  • LoTerra: A decentralized lottery platform built on the Terra blockchain
  • Mirror Protocol: Allows for the creation of fungible assets or “synthetics” that track real-world asset prices
  • Talis Protocol: A platform where artists can sell their creations and offer services
  • Vega Protocol: A platform for minting and trading derivatives

How Does Terra Work?

Say you want to buy a movie ticket, one of the products most often purchased using CHAI (one of Terra’s most popular decentralized apps, or dApps). First, you’ll have to mint your own Terra stablecoin on the website, burning the requisite number of LUNA tokens in the process. Once you have your stablecoins, you can use CHAI’s mobile app to pay for your tickets online or in-store.

Once you buy a ticket with your stablecoins, Terra’s blockchain generates a small transaction fee that is distributed between LUNA delegators — token holders who choose to delegate their LUNA coin to a staking pool, in order to secure the network.

Terra was built on Cosmos SDK and uses a delegated proof-of-stake consensus secured by decentralized validators who settle transactions in exchange for rewards. Validators and stakers can also participate in the network consensus, having voting power that’s proportional to their delegated stake. The 130 active validators with the most LUNA tokens are chosen to secure the network.

Terra’s stablecoins are algorithmic stablecoins, meaning that the protocol is designed to achieve price stability by using algorithms. For instance, the value of UST is equivalent to US$1 and should remain stable thanks to the LUNA token. When UST drops below US$1, LUNA supplements the UST supply to help it maintain its peg to the dollar.

Users who want to mint Terra stablecoins need to burn the dollar-equivalent amount of LUNA. A small portion of LUNA tokens used to mint stablecoins — also known as seigniorage — is sent to the community treasury, which makes minting stablecoins profitable for the network. It’s a process similar to the seigniorage from which central banks profit when they print money.

Algorithmic stablecoins are considered a very controversial stablecoin class that can be susceptible to extreme price volatility. The prices of algorithmic stablecoins are secured by smart-contract algorithms, financial engineering and the market incentives of independent participants — factors that have proved to be unreliable in times of crisis. This was the case with Iron Finance’s bank run, as IRON, an algorithmic stablecoin, lost its peg and crashed from US$1 to nearly zero — and wiping out over US$1 billion in market cap — in a single day due to poor tokenomics.

How Many Terra (LUNA) Coins Are There In Circulation?

Terra has a supply of 1 billion tokens. If this number is exceeded, LUNA is burned until it returns to the equilibrium supply level. New LUNA tokens are minted through the protocol’s algorithm, as needed, in order to maintain the price of Terra stablecoins.

LUNA was first made available for purchase in a private token sale for initial investors, which included the investment arms of major exchanges such as Binance, OKEx and Huobi. The sale concluded in August 2018, and as a result, Terra raised $32 million. Of the 385,245,974 LUNA minted for the sale, 10% was reserved for Terraform Labs, 20% for employees and project contributors, 20% for the Terra Alliance, 20% for price stability reserves, 26% for project backers and 4% for genesis liquidity.

Where Can You Buy Terra (LUNA)?

Terra’s native token, LUNA, is listed on several cryptocurrency exchanges — including Huobi, Bitfinex and Upbit — where it is available to be traded against fiat currencies, stablecoins and other cryptocurrencies.

Are you interested in buying LUNA or other cryptocurrencies such as Bitcoin? CoinMarketCap has an educational section — Alexandria — to teach you all about crypto and how to buy your first coins.

 

6 Things To Know Before You Buy Terra (LUNA)

1. The Terra Protocol Offers Multiple Stablecoins Tied To Different Currencies

Terra’s main focus is stablecoins, which are cryptocurrencies pegged to another asset. There are already quite a few stablecoins, most of which are pegged to the U.S. dollar. Terra offers one of those in TerraUSD (UST), but it also has stablecoins pegged to many other currencies, including the South Korean won, the Euro, and the Mongolian tugrig.

Since stablecoins generally maintain the same price, they have a better shot of catching on as a way to transfer funds and to buy goods and services. Most cryptos are volatile, which limits their uses. People who buy them tend to hold onto them, hoping the price will go up. Businesses are wary of accepting them because the price could also go down. Neither scenario is an issue with stablecoins.

2. Terra Luna Tokens Help Balance Out Its Stablecoin’s Prices

Luna tokens are Terra’s way of keeping its stablecoin prices where they should be. It incentivizes trading between Luna and stablecoins when it needs to increase or reduce the stablecoin supply.

Here’s a hypothetical example — UST, Terra’s U.S. dollar stablecoin, is in demand. That has raised the price to $1.05 when it should be $1. To counteract this, Terra needs to add more UST tokens to the supply.

Terra then lets its Luna token holders convert Luna to UST, with each $1 of Luna being worth 1 UST. After the token holders do that, theys can sell the UST at the higher price of $1.05, making a 5% profit on however much Luna they converted.

It works like this with all of Terra’s stablecoins. And in periods of low demand, Terra lets its stablecoin holders convert to Luna at a profit. That reduces the stablecoin supply, and pushes the price back up.

3. Luna Tokens Are Also Used For Staking And Governance Of The Project

Luna token holders can stake their tokens. When you stake Luna, you pledge those tokens to the network, and they’re used to verify transactions. There’s no risk in doing this. You can always unstake your tokens (unstaking can take up to 21 days). If you stake Luna, you receive a cut of the transaction fees Terra collects on the use of its stablecoins.

Token holders also have a say in the future of Terra. Because Luna is a governance token, holders have voting rights in the project.

So far, Terra has had most of its success in its home country of South Korea. According to a Terra video from May 2021, its stablecoin pegged to the South Korean won is used by over 2 million people per year for over $1 billion in spending. That video reported that Terra’s stablecoin pegged to the Mongolian tugrig was used by 40,000 people monthly.

To Terra’s credit, it already has a customer base. There’s no guarantee that it will successfully expand to the United States, but as we’ll get to now, it’s providing a big incentive to buy its U.S. dollar stablecoin.

5. Terra Is Offering 20% Interest On UST

On March 17, 2021, Terra launched a savings and lending protocol called Anchor. This protocol allows users to deposit stablecoins and earn interest on them. On UST deposits, the annual interest rate is about 20%.

Since UST is a stablecoin that normally has a value of $1, being able to earn 20% interest on it is enticing. It is worth noting that the interest rate could change in the future, and even stablecoins aren’t as secure as money stored in savings accounts.

The high interest rate could help expand UST’s user base. If it does, that will likely be good for the price of Terra’s Luna token.

6. The Terra Blockchain Ranks In The Top Five In Terms Of Revenue

The Luna cryptocurrency hasn’t quite broken into the top 20 by market cap. But the Terra blockchain is already one of the biggest. Revenue numbers from Token Terminal have Terra in the top five. It’s behind Ethereum (ETH), the Binance Smart Chain, and Bitcoin, and neck and neck with Polygon (MATIC).

That’s a good sign for Terra fans. While many cryptocurrency projects aren’t in use yet, Terra is one of the biggest moneymakers.

Why Is Luna Rising?

The rise in Luna’s price can be attributed to a few factors. According to Delphi Digital, a leading cryptocurrency research firm, the negative funding rate in major exchanges signalled the presence of delta neutral traders, a group of investors who take multiple positions to offset delta exposure.
The price increase over the last few days was likely triggered by investors buying spot LUNA to lock up in the Astroport lockdrop, then hedging their position via perpetual futures to remain delta neutral,” Delphi Digital said in a research note published on Monday.

Terra’s Achievements

Terra has built a system with a six-second average block time, according to its founders. All transactions on the Terra network pay gas fees, in which the minimum price is set by each validator. For transactions involving stablecoins, extra fees are added on top of the gas fees to maintain stability and discourage foreign exchange arbitrage. The most common type of stablecoin fee, the stability fee, is levied on all non-market swap stablecoin transactions, and fees range from 0.1% to 1%, hard-capped at 1 TerraSDT. Spread fees are market swaps that involve stablecoins and LUNA. Its minimum fee is set to 0.5% and may fluctuate when there is market volatility. For market swaps between stablecoins, a “Tobin tax” is applied by on-chain governance. Most market swaps will incur in .35% tax, and some stablecoin pairs have had to pay as much as 2%.

Terra’s CHAI payment app is another significant component of the ecosystem, providing an experience that aims to be as frictionless as existing mainstream payment apps.

Interoperability is also being addressed with Terra Bridge — a cross-chain system facilitating asset transfers between Terra, Binance Smart Chain and Ethereum. And developers are working on bringing Terra stablecoins to Solana.

Two projects also add to the ecosystem: Mirror and Anchor. Mirror Finance allows users to create synthetic assets, called mAssets, which mirror the price of stocks — designed to enable UST holders to gain exposure to equities. Mirror’s Shuttle bridge also enables mAsset swaps on the Ethereum network, making the ecosystem more interoperable.

The Anchor Protocol is a crypto platform that offers access to stable interest rates. Crypto deposited on the protocol is automatically staked to a proof-of-stake blockchain network, without users having to find their own liquidity pools.

What The Future May Hold?

Terra is a permissionless, decentralized, programmable payments network. The protocol offers low-cost payments and transactions for online vendors and their customers. Terra’s open infrastructure is also well suited to dApps, creating a budding ecosystem around the protocol.

Terra has signed partnerships with more than 15 e-commerce companies, including Tiki, Qoo10, Carousell and Woowa Brothers. Other partners include mobile payment service CHAI and financial services company BC Card.

Terra has also set up a US$150 million ecosystem fund led by investors such as Arrington Capital, BlockTower Capital, Galaxy Digital, Hashed and Lightspeed Ventures. Developers can openly submit proposals to the fund, which it is hoped will accelerate the ecosystem’s development.

Terra’s most anticipated update, the Columbus-5 mainnet upgrade — also known as “Col-5” — aims to introduce the burning of seigniorage fees, integrate mutual insurance protocol Ozone, and integrate the Wormhole Token Bridge — enabling easier tokenized asset transfers between Terra, Solana and Ethereum. 

Terra currently has US$12.9 billion in total value locked across the ecosystem’s protocols. Terra’s strategy to create an interoperable, user-friendly payment platform may make it an attractive alternative for crypto beginners, subject to the still-emerging list of risks and caveats associated with the stablecoin space.

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