One of crypto’s main draws for new investors is also its major weakness — price volatility. While capitalizing on major price swings can be a great way for traders to make quick gains, volatile prices are also pretty scary and off-putting for people looking for long-term investments. Of course, in crypto, every problem has a solution. For volatility, that solution lies in stablecoins.
What is Terra (Luna)?
The creators of Terra, Daniel Shin, and Do Kwon, wanted to create a cryptocurrency ecosystem that had price stability, but with the ability to handle high transaction volumes, the capability to grow and a focus on decentralised finance, similar to a central bank. Terra is an open-source blockchain payment platform for algorithmic stablecoins which are cryptocurrencies that track the price of currencies or other assets. The Terra blockchain enables users to spend, save, trade, or exchange Terra stablecoins instantly on it.
The Terra protocol creates stablecoins that are algorithmically pegged to the price of any fiat currency. For example, 1 TerraUSD is equal in value to $1 USD. This family of stablecoins is called Terra. Each stablecoin is, in effect, backed up and exchangeable for the governance and utility token, LUNA.
This form of collateralisation is done in a similar method as fiat currency (government-backed currency like the US dollar) once did by using an asset such as gold.
How Does Terra (LUNA) Work?
Terra’s stablecoins use algorithmic methods to control their supply. LUNA is the variable counterweight to the Terra stablecoin and absorbs its price volatility. The Terra ecosystem can be seen as consisting of a Terra stablecoin pool and a LUNA pool.
Terra uses two tokens for its ecosystem – Terra stablecoins and LUNA.
The native currency, LUNA coin plays a vital role in several aspects of the Terra project. It underpins the consensus mechanism used in Terra – Proof-of-Stake. The proof-of-stake model allows owners of a LUNA to stake LUNA coins and create their own validator nodes.
Terra Luna Use Case: Merchant Payment Solution
In Mongolia and South Korea, Terra is used widely across the country in gas stations, taxis, supermarkets and more due to its partnerships with mobile payment and e-commerce companies.
With many applications and protocols supported on its network, huge growth over the recent years and its adoption by many e-commerce corporations, Terra has become the fourth largest smart-contract cryptocurrency platform and a major player in decentralized finance. As of September 2021, it offers stablecoins pegged to the U.S. dollar, South Korean won, Mongolian tugrik and more — this looks set to increase over the coming years.
Terra is also supported by the Terra Alliance, a group of businesses and platforms advocating for the adoption of Terra. This includes e-commerce platforms from 10 different countries, representing a user base of 45 million and a gross merchandise value of $25 billion according to the company.
Terra Luna Use Case: Governance
LUNA can also be used as a utility token to pay transaction fees and a governance token to take part in the platform’s governance system. The Terra platform has a governance portal which allows users to create new proposals and vote on proposals.
To do so, users must deposit 512 LUNA. When a new proposal is created. Other LUNA holders can stake their LUNA tokens to cast votes. In November 2021, the Terra community voted to burn around 88.7 million LUNA to fund new services, including developing their security for decentralized finance.
The other token utilised in the Terra project is the Terra stablecoin. This is a collection of algorithmic stablecoins. Stablecoins are cryptocurrencies with a fixed value that’s usually pegged to a leading fiat currency like the U.S. dollar, a basket or fiat currencies or exchange-traded commodities such as precious metals.They are designed to bring an element of stability into the cryptocurrency market.
Recognizing the differences in global markets and currencies, Terra aims to be a family of cryptocurrencies that are each pegged to the world’s major currencies. Terra currently has several fiat-pegged stablecoins that track different currencies and take names from them. Examples include TerraUSD (UST), which tracks the US dollar, TerraKRW, which is pegged to the South Korean won and TerraMNT, tracking the Mongolian tugrik.
Terra Luna Use Case: Stablecoin Pools
The way in which LUNA and the Terra stablecoins operate is as two pools. To maintain Terra’s price (as pegged to the fiat currency), the LUNA supply pool adds to or subtracts from Terra’s supply; users burn LUNA to mint Terra and burn Terra to mint LUNA. The Terra algorithmic protocol provides the mechanisms in which this works.
If the Terra stablecoin is trading at slightly higher than its pegged currency i.e., demand for the stable coin is higher than the supply, this means the supply of Terra should be increased to match. The blockchain protocol incentivizes users to mint Terra by burning LUNA. This has the effect of lowering the price of the Terra stable coin and increasing the LUNA price. This process is continued until the Terra coin matches its currency peg.
On the other hand if Terra is trading lower than its fiat currency, this implies there is more supply for the stablecoin than demand. This leads to the protocol incentivizing users to burn Terra and mint LUNA. Supply is reduced for Terra and the price increases. The trading price of LUNA is lowered as a result. Again this will continue until the Terra coin tracks the fiat currency accurately.
The Terra Ecosystem and Decentralized Finance
Terra’s aim is to become a leading e-commerce payment platform and decentralized finance service provider. Decentralized finance provides the opportunity for greater innovation in financial products, decreased fees and wait times, increased privacy and accessibility for the average person.
However the main limitations that have presented themselves are the volatility of the market, the adoption of a currency by the masses and institutions to the point of usefulness, scalability and the store of value. Alongside the stability and scalability of its currency, Terra has implemented many features and invested in projects to tackle these limitations.
An important feature of Terra is smart contract capability. A smart contract is a self-executing program with the terms of the contract written directly into the code. The program and the agreement are distributed across a decentralized blockchain network.
The contract is automatically executed when certain conditions are met. Once executed, it is nearly impossible to reverse or alter. Smart contracts allow transactions and agreements to be anonymously executed among two or more parties that do not trust each other, without the need for a third-party authority, governance or other external regulation. This is vital for decentralized finance.
Terra also has many projects and protocols to advance its capabilities and increase adoption. Examples include:
- CHAI, a South Korean payments project used by 5% of the population
- Andromeda, an NFT Protocol
- Mirror protocol, enables the creation of synthetic digital assets
- Memepay, a Mongolian payments product
These, alongside others, have helped create an ecosystem that has a chance at building an adoptable form of decentralized finance on the Terra platform with mainstream appeal.
Terra (LUNA) Price Stability
In Terra’s whitepaper, it describes its use case as meeting “demand for a decentralized, price-stable money protocol in both fiat and blockchain economies”. It aims to be price-stable and growth-driven with mass adoption.
Over the past few years there has been major growth, especially in Asian markets, with a significant population in South Korea already using Terra daily. Its multi-faceted approach to decentralized finance has led to a huge growth in capability and some success in mainstream adoption, though still in early stages. Overall this cryptocurrency has real potential as a leader in the decentralized finance movement.