Terra LUNA started as a niche platform for stablecoins. It then sprinted into the mainstream as one of the largest cryptocurrencies until it all came crashing down in May 2022.
Let’s tackle everything about Terra LUNA in this article.
Terra (LUNA) at a Glance
Terra is an all-encompassing blockchain network that offers a range of services and benefits. Terra uses its native token LUNA as reserves for its stablecoin.
Luna coin is a cryptocurrency designed to help individuals preserve the environment. It was crafted by South Korean firm Terraform Labs and launched on cryptocurrency exchanges in July 2019.
In order to prevent the extreme volatility that has plagued other stablecoin networks, Terra implements a unique approach: rather than collateralizing their tokens with cash or other cryptocurrencies, they use their own native token as collateral. Each Terra token (LUNA) is convertible into 1 Terra Stable Coin (USC). The current LUNA USDT is $2.63 and is available from Binance, KuCoin, eToro, and other exchanges.
This creates an automatic and dynamic reserve—in order to drive down the price of LUNA to near-zero, the network would have to lose all confidence and trust in the network. This means that for every USC created, there is one LUNA destroyed. The same goes for when users wish to redeem their USC for LUNA—to do so, they must destroy 1 USC and send it back to the smart contract.
Terra Stablecoins
When you hear “stablecoin,” you might think of a currency that is stable, like the US dollar. The US dollar is stable for a number of reasons—the most significant reasons are that it’s issued by the federal government and it’s freely exchangeable for other fiat or crypto currencies.
In comparison, stablecoins on the Terra network use a different method to maintain price parity. They use algorithmic methods to control their supply and maintain the peg. This means that they’re not back by anything tangible like a reserve of gold, but instead backed up and exchangeable for the governance and utility token LUNA. LUNA can be thought of as Terra’s own version of a stablecoin.
Terra acts as a counterparty for anyone looking to swap their stablecoins for LUNA and vice versa, which affects both tokens’ supplies. So, when you hold $100 worth of DAI on the network, Terra is managing $100 worth of DAI and $100 worth of LUNA tokens on its books at any given time.
How Does It Work?
When minting TerraUSD (UST), you can use your Luna tokens to mint UST at a 1:1 conversion. However, for the Columbus-5 update, Terra will burn 100% of the Luna tokens provided when minting. Previously, only a portion of the tokens were burned. While this is an improvement, minting still doesn’t allow you to create UST out of thin air—you’ll need to convert LUNA into UST by burning them.
If you want to issue your own Coin Supply at a larger rate than the Terra team has pre-minted, then you’ll need to obtain additional LUNA and burn those as well. When Luna tokens are burned, they’re gone forever—they can’t be unburned or “reformed”. The Terra team has a hard-coded inflation rate that is set to 5% per year (of which 2% is used for staking and 3% for development). This means that if you have 100 LUNA and don’t burn them all in one transaction, you’ll have 105 LUNA next year.
Defining LUNA Token
Terra is a blockchain protocol that enables people to create and run economic applications that can be used by anyone.
The Terra project has four native tokens, each with its own role in the network:
- Luna (the token we are creating this brief for) is a utility token that allows users to pay transaction fees in the gas system of the Terra protocol.
- Crater is a governance token. By staking your Crater tokens, you can propose and vote on changes to the Terra protocol governing bodies.
- Ceres is a stablecoin created with Terra’s technology that has a fiat-backed peg and is designed to be used as a payment method within the network’s ecosystem, while absorbing demand fluctuations of the network’s other currencies (both crypto and fiat).
- Mercury is another stablecoin created with Terra’s technology that has a fiat-backed peg and is used as an incentive for miners to provide computational power for processing transactions on the network’s DPoS consensus mechanism. Its supply grows at a rate that matches the expected growth in transaction volume on the network over time, which means it will always meet demand for itself as well as stablecoins minted on Terra.
Wrapping Up
Terra will be able to take advantage of its cross-chain compatibility with other Cosmos SDK blockchains in the future. As the stablecoin topic is essential worldwide in connection with regulation and mainstream adoption in payment methodology, Terra has a chance to bloom not just in Asia.
The growing popularity of the project is expected to continue, and future price predictions are looking optimistic.