What is Terra blockchain? LUNA explained
Terra LUNA is a decentralized finance (DeFi) blockchain protocol supporting an ecosystem for users to mint, manage and trade stablecoins that can be tied to any sort of fiat. Additionally, the Terra protocol has expanded to offer support for stablecoin developers to build Terra DeFi projects. The project consists of two cryptocurrencies: Terra and LUNA.
Terra is the stablecoin standard pegged to fiat and other currencies. For example, TerraUSD (UST) is tied to the United States dollar, while TerraKRW (KRT) is tied to the South Korean won.
The native token, Terra (LUNA) is the network’s staking and governance asset. Users stake LUNA to earn a place in governance and to become validators and obtain rewards. Users can also burn LUNA to mint Terra’s UST token or one tied to their local fiat.
However, it’s important to note that while these stablecoins are tied to the value of fiat, they’re not backed by fiat. Instead, the LUNA token is considered an algorithmic stablecoin.
An algorithmic stablecoin is an asset that derives value through a set of rules rather than being tied to an asset itself. This method enables Terra users to invest in the price of these linked without needing to hold their physical counterparts.
To remain stable, Terra incentivizes its users to take advantage of arbitrage (the purchase and sale of the same asset in various marketplaces at the same time). Essentially, if UST is valued at $1.01 instead of $1.00, users can burn $1.00 worth of LUNA to mint $1.01 worth of UST.
Investors can then sell the UST for $1.01, earning a profit of $0.01 for their efforts. Ideally, users will keep this process going until the UST value decreases back to $1.00.
Conversely, if UST’s value is below $1.00, they can purchase the UST for $0.99 and burn 1 UST for $1.00 worth of LUNA, earning $0.01 for every burn. Once again, users would keep this process going until UST returns to $1.00.
Terra users can access this market swap feature via the official Terra Station wallet. The price information is pulled from off-chain oracles so users always know the target stablecoin price.
The users who manage this volatility on the Terra network are called validators. Validators are incentivized to manage volatility via transaction fees and a process called seigniorage. In terms of fees, validators are simply paid a small fee every time a transaction occurs on the Terra network. These fees vary based on the current volatility of UST and LUNA.
Seigniorage is a little more complex. Seigniorage is defined as the profit from creating a currency. For example, if it costs a government $0.10 to create $1.00, the resulting $0.90 profit is called seigniorage.
In Terra’s case, whenever the network mints Terra or LUNA, the minuscule profit from minting is distributed to validators and the network’s treasury, hence the $0.01 arbitrage profit mentioned above.
To sum it all up, when one mints Terra an equivalent amount of LUNA is burnt and vice versa. Validators commit to this process in return for rewards, ensuring the network is safe from volatility and the algorithmic stablecoins can remain stable.
How does Terra work?
Terra is a proof-of-stake (PoS) network powered by Cosmos and utilizes Tendermint for consensus.
PoS networks require validators, or users who run full nodes with the complete history of a blockchain, to process transactions. In doing so, validators are rewarded for each processed block of transactions via transaction fees.
When a validator proposes a block of transactions, other validators must vote on it in a two-round process. If a block receives a positive majority vote, it commits to the blockchain and the validators earn for their efforts. The validator who proposed a block earns more.
However, a validator must be chosen by the community via staking. LUNA holders, also known as delegators, must choose a validator in which they’ll stake their LUNA. The more LUNA staked toward a validator, the more they’re valued by the community and the more often they can propose a block and earn rewards.
Delegators also earn a cut of their validator’s rewards in return for their stake. Earning a cut of a validator’s rewards incentivizes delegators to consistently vet their validators to ensure a reliable consensus.
A validator who fails to remain online or otherwise shirks their responsibilities will see their rewards slashed alongside their delegator’s. The two positions are different but vital factors of Terra network consensus.
That said, only the top 130 validators are considered active within the network. If a validator’s amount of staked LUNA falls below the lowest staker in the top 130, they’re deemed inactive. In fact, validators can fall into one of three states within the Terra network: bonded, unbonding and unbonded.
While validators are decided largely off of their delegators, validators can choose to “self-bond” or stake their own LUNA to themselves. Self-bonding provides validators with a higher chance to remain active while also signaling their validation intentions as their own funds are on the line. The Terra network’s other term for self-bonding is skin-in-the-game.
Interestingly, a delegator’s LUNA can also have the three states of bonded, unbonding or unbonded. Unbonded LUNA is LUNA the delegator can trade, as it isn’t staked to a validator.
Bonded LUNA is staked to a validator and earning rewards and cannot be traded by the delegator. In contrast, unbonding LUNA is a process, and its owners cannot earn rewards during this time. It takes 21 days for unbonding LUNA to become unbonded so the delegator can use it freely.
If a delegator chooses to redelegate their LUNA stake, they can do so whenever via the Terra network’s redelegate option. Redelegation allows a delegator to subvert the 21-day waiting period and instantly redelegate to a more deserving validator.
Both delegators and validators serve a purpose in Terra’s network governance alongside transaction validation. To start, community members propose a change or an upgrade by depositing 50 LUNA — a barrier in place to prevent proposal spam.
From there, delegators and validators vote on proposals utilizing their staked LUNA. One LUNA equals one vote, and each proposal experiences a two-week voting period. A validator must vote with their entire LUNA stake and a delegator’s vote will follow their validator unless the delegator specifies otherwise. Delegators need to vote themselves if they want an individual say.
Once the two-week period has passed, a proposal will have either a majority yes or no vote. If 50% or more users vote yes, the proposer can implement the suggested changes via a network transaction, which will be implemented into the blockchain via validators. A proposer will earn their deposits back after a successful proposal implementation.
However, some voters can choose to veto the proposal if a proposal is considered problematic. If enough users veto, the proposal will be denied and Terra will burn the proposer’s deposit instead of refunding it.
Terra DeFi blockchain explained
Now, the primary purpose of Terra is for users to interact with decentralized applications (DApps) without suffering from volatility or high gas fees like its competitor Ethereum.
Generally, developers build a Terra DApp by requesting funding from the Terra Treasury. Developers apply to the treasury by providing their DApp website, defining what their funding will go toward, describing in-DApp governance and detailing any potential DApp audit data.
Once developers have applied to the Terra Treasury, validators vote on whether or not the DApp can pull funding alongside the amount of that funding. Terra offers funding based on a DApp’s weight or its importance to the overall network, though the amount of that funding will vary on a case-by-case basis. The more convincing a DApp, the more funding it will likely receive.
Validators can also vote to blacklist a DApp if it misuses treasury funds, rendering it ineligible from all future funding. Conversely, a DApp can earn additional financing based on two factors: robust economic activity and efficient use of funding.
Successful developers may also choose to airdrop their tokens to LUNA holders, further increasing awareness and potential user adoption.
Terra’s developers believe seigniorage will play a big part in the network’s future. After all, if developers can earn a consistent stream of funding from seigniorage, they can offer cheaper services to customers such as lower interest rates for a credit protocol or additional discounts on certain products.
Popular Terra DeFi projects
Below are some popular Terra DeFi projects based on volume and user counts.
CHAI
CHAI is a mobile payments app and one of the first Terra DeFi projects. CHAI is in use by over 2.2 million South Korean citizens as of April 2021. The project enables citizens to convert their fiat to the KRT stablecoin, which is done automatically by simply linking their bank account to the DApp.
Once linked, citizens can pay with KRT which offers lower fees and faster settlements for merchants. Due to these lower fees, merchants can provide customers with discounts when they pay via CHAI.
Anchor Protocol
The Anchor protocol offers users higher savings yields than traditional banks, as it doesn’t require intervention from a third party. While other crypto platforms offer high savings yields as well, they’re based on volatile cryptocurrencies which can be off-putting for newer traders. Anchor users invest in stablecoins and hold them in their Anchor wallets for lending purposes, avoiding the volatility associated with other lending platforms.
These assets are then staked into a pool for borrowers to pull funds from. In return for their lending services, stakers earn interest based on borrowers and their interest rates. The more funds a user stakes the more they potentially earn in interest.
Mirror Protocol
The Mirror Protocol generates synthetic assets tied to the value of real-world assets, enabling users to invest in various products without needing to hold the actual asset. Similar to Anchor, users on Mirror provide liquidity for borrowers to pull funds from and earn rewards in the form of the Mirror Token for doing so.
History of Terra blockchain
Terra was founded in 2018 by Do Kwon and Daniel Shin and launched its mainnet in 2019. Kwon and Shin built Terra to offer users the stability of fiat currencies while harnessing the power of blockchain technology for faster and cheaper settlements than traditional payment solutions. The two founders also believed that such options would increase blockchain adoption.
The Terra Alliance backs Terra. The Terra Alliance is a group of e-commerce businesses and platforms from around the world pushing for Terra adoption. Businesses within the Terra Alliance have a combined value worth tens of billions and more than 45 million customers across the companies.
Is LUNA a good investment?
LUNA is a growing powerhouse within the DeFi space. As of December 2021, Terra overtook the Binance Smart Chain to become the second-largest DeFi protocol with more than $20 billion locked into the network across its applications.
That value is likely to rise even more, as LUNA reached a market cap of $28.5 billion in January 2022. Alongside this news, the Terra network revealed a proposal detailing a plan to offer $139 million in UST to various DeFi projects on Ethereum, Solana and Polygon. Should this proposal go through, the UST stablecoin will expand to networks it wasn’t initially supported by, which would likely increase adoption and its value.
Terra’s cross-chain initiative is due to a recent Cosmos upgrade called Stargate. Stargate enables Cosmos-powered chains to interact with other compatible networks via its Inter-Blockchain Communication protocol. Should you buy Terra (LUNA) based on these statistics? That’s up to the individual buyer.
How to buy Terra (LUNA)?
Those wondering where to buy Terra and its LUNA token should understand that LUNA is available on various exchanges including but not limited to Binance, KuCoin, Bitfinex, Kraken, Gemini, OKX and Huobi Global. Many of these exchanges feature LUNA trading pairs with Tether (USDT), USD, Bitcoin (BTC) and Ether (ETH) alongside local fiat depending on the customer’s country of residence.
Let’s examine how to buy Terra on the OKCoin exchange.
Step 1: Sign-up for OKCoin
Sign up for the OKCoin exchange by creating an account and verifying your identity and payment information as required by Know Your Customer (KYC) and Anti-Money Laundering (AML) policies.
Step 2: Fund your account
Once all of the requirements are filled out, one must fund their OKCoin account via linking their bank account. This can be done by going to Assets on the top right and clicking Deposit. From there, select USD, go to the Select Payment Method drop-down box and click Add Account. Input your bank account information for verification.
Step 3: Find the LUNA/USD trading pair
When your account is funded, head to the Trade tab and search for LUNA on the top left side of the page. OKCoin offers a USD/LUNA trading pair, meaning that fiat is all that’s required here. Select the trading pair.
Step 4: Buy LUNA
Once the LUNA/USD trading pair is selected, choose an order type from the drop-down menu on the right. OKCoin offers various investment options such as Limit Order, Market Order and Stop Order, among others.
After selecting an order type, input the amount of LUNA you’d like to buy. Finally, click the Buy LUNA button to fulfill your order type.
Once acquired, customers can transfer their LUNA to the official Terra wallet, Terra Station. Terra Station offers simplified access to token swaps, staking, governance and other network interactions.
Also, it’s important to note that LUNA is considered a token, as it’s an asset built on top of an existing blockchain. The Terra network is built on top of Cosmos, making LUNA a token rather than a coin, which is an asset native to an underlying chain. Cosmos (ATOM) is considered a coin in this case.
The Future of LUNA
The future of LUNA is impossible to predict with complete accuracy, but current trends point toward bright times to come for the stablecoin project.
LUNA is home to some very popular DeFi projects, even if there aren’t very many to speak of at the moment. Terra’s overtaking of the Binance Smart Chain for the second most popular DeFi platform is nothing to ignore, either.
It appears that LUNA’s long-term funding plan can lead to even more successful projects built within its ecosystem, and its plans to expand to other popular blockchain networks can grow those projects even more.
One should also note that Terra’s focus on stablecoins enables it to avoid the volatility associated with other cryptocurrencies such as Bitcoin and Ether. By offering a more stable network than its competitors, Terra might remain more appealing to newer crypto investors than more volatile platforms.
Of course, it’s always possible that Ethereum’s eventual upgrade to proof-of-stake might overtake competitors like Terra, being that Ethereum has more mindshare than just about any project out there. But until Ethereum’s implementation is complete, platforms like Terra fill the void left by the world’s second-largest blockchain platform and its issues, which could lead to long-term success after all.