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HomeWhat isWhat is Terra? Luna Explained 2022

What is Terra? Luna Explained 2022

What is Terra?

Terra, which operates on its own blockchain, uses stablecoins tied to the US dollar, South Korean won, Mongolian tugrik and other currencies.

What Is Luna?

Terra’s indigenous coin, LUNA, is being used to regulate the price of the protocol’s stablecoins, which are backed by the Terra blockchain.

To further Elaborate:

A blockchain technology called Terra, which operates on its own blockchain, powers price-stabilized global payment networks by using stablecoins tied to fiat currencies. Terra, according to its white paper, combines the price stability and widespread acceptance of fiat currencies with the censorship-resistance of Bitcoin (BTC), as well as the capacity to make rapid and inexpensive payments.

In January 2018, Terra’s development started, and the mainnet was formally released in April of the following year. Currently, it provides stablecoins tied to the US dollar, the South Korean won, the Mongolian tugrik, and the International Monetary Fund’s Special Drawing Rights basket of currencies, with plans to expand the range of available alternatives in future years.

Terra’s indigenous coin, LUNA, is being used to regulate the price of the protocol’s stablecoins, which are backed by the Terra blockchain. The ability to propose and vote on governance proposals gives LUNA holders the functionality of a governance token, as well as the functionality of a utility token.

Terra was created in January 2018 by Daniel Shin and Do Kwon. Terra is based in Seoul, South Korea. With an emphasis on price stability and usability, the two co-founders see the initiative as a tool to accelerate the adoption of blockchain technology and cryptocurrencies in the marketplace. Kwon has been promoted to the post of CEO of Terraform Labs, the firm that developed the Terra robot.

Prior to founding and leading Terra, Shin co-founded and served as CEO of Ticket Monster, also known as TMON, a large South Korean e-commerce platform that was acquired by Samsung. He then went on to develop Fast Track Asia, a startup incubator that partners with entrepreneurs to help them build fully viable businesses.

Kwon formerly created and served as CEO of Anyfi, a firm that develops decentralized wireless mesh networking solutions for small and medium-sized businesses. In addition, he has worked as a software engineer for companies such as Microsoft and Apple.

What is Terra (Luna)?
Source: CoinPedia

Terra Function and LUNA

The Terra cryptocurrency is a stablecoin that tracks the value of fiat currencies. Users may create fresh Terra by consuming Luna. Stablecoins are called after the currencies that they are backed by. For example, the basic Terra stablecoin monitors the price of the International Monetary Fund’s SDR, which is known as TerraSDR or SDT. TerraUSD or UST, TerraKRW or KRT, and TerraKRW or KRT are examples of other stablecoin denominations. All Terra denominations are contained inside a single pool.

Luna is the native staking token of the Terra system, and it is responsible for absorbing the price fluctuation of Terra. Luna is used in government and mining operations. In return for rewards from transaction fees, users stake Luna to validators, who record and validate transactions on the blockchain on behalf of other users. In other words, the more Terra is used, the more Luna is valued.

StableCoins

The Terra protocol is distinguished by the presence of stablecoins, which are digital assets that mirror the value of an underlying currency. Terra stablecoins, being a digital form of money, may be used in the same way as fiat currency, with the additional advantages of blockchain technology, such as an immutable public record, immediate transactions, shorter settlement times, and lower transaction costs.

Stablecoins are only useful to users if the price of the cryptocurrency remains stable. The Terra protocol relies on the fundamental market dynamics of supply and demand to keep the price of Terra stable over time. When there is a strong demand for Terra and a limited supply of Terra, the price of Terra rises as a result. When the demand for Terra is low and the supply is excessive, the price of Terra falls as a result. The protocol guarantees that the supply and demand for Terra are constantly in balance, resulting in a steady price for the commodity.

Expansion And Contraction Logic

Consider the whole Terran economy to be divided into two pools: one for Terra and one for Luna. The Luna supply pool either contributes to or subtracts from Terra’s supply in order to keep the price of Terra stable. Users burn Luna to mint Terra, and users burn Terra to mint Luna, all of which is rewarded by the algorithmic market module of the protocol.

Expansion: When the price of Terra is high in relation to its peg, it indicates that supply is insufficient and demand is excessive. Users are encouraged to burn Luna and mint Terra as part of the procedure. Terra’s pool grows as a result of the increased supply, which helps to maintain a healthy balance between supply and demand. Users may continue to mint Terra from the Luna that has been burnt until Terra reaches its goal price. As a result of this process, the Luna pool shrinks, causing the price of Luna to rise.

The price of Terra is excessively low in relation to its peg when the supply of Terra is excessive and the demand for Terra is insufficient. Users are encouraged to burn Terra and mint Luna as part of the procedure. Because to the decline in Terra’s supply, there is a shortage of Terra, and the price of Terra rises as a result. More Luna is coined from the ash of burnt Terra until the price of Terra meets its aim. The price of the Luna pool fluctuates between increasing and decreasing.

Luna is the variable counterpart of Terra, which is a steady investment. Luna’s price rises in response to an increase in demand for stablecoins, which is achieved via regulating supply.

Module And Arbitrage

Terra’s price stability is ensured via the protocol’s algorithmic market module, which incentivizes the minting and burning of Terra by creating arbitrage opportunities between buyers and sellers. Arbitrage is the process through which a user gains from pricing disparities between two or more different marketplaces.

In addition, the Terra protocol’s market module allows users to always exchange 1 USD worth of Luna for 1 UST, and vice versa, therefore motivating users to keep the price of Terra constant. This is true for all Terra stablecoin denominations, and the same logic applies to them all.

Market swaps in Terra Station may be used to get access to the mint and burn functions of the market module. Users can learn more about market swaps here. Visit the Terra Station market swap guide if you want to learn more about how to utilize the market exchange function of the game.

Example:


If 1 UST is trading at $1.01 USD, users may use the market swap function of Terra Station to exchange 1 USD of Luna for 1 UST using the market swap feature of Terra Station. 1 USD of Luna is burned, and 1 UST is created on the market. Users may then sell their 1 UST for 1.01 USD, making a profit of.01 USD via arbitrage, and this money is added to the pool of UST. This arbitrage continues until the UST price falls back to the level of the USD price, so preserving Terra’s peg to the dollar.

When it comes to contraction, the same arbitrage process operates in reverse.

Example:


Users may purchase 1 UST for.99 USD if 1 UST is trading at.99 USD at the time of writing. Users may then use Terra Station’s market swap mechanism to exchange one UST for one USD of Luna, completing the transaction. The trade results in the burning of one UST and the minting of one USD of Luna. The trade results in a profit of.01 UST for the users. This arbitrage continues, and UST is destroyed in order to mint Luna until the price of UST returns to 1 US dollar again.

How Does Terra (Luna) Scale?

The Terra protocol is scalable in that it is meant to ensure the price stability of Terra regardless of the size, volatility, or demand of the cryptocurrency market. With the monetary policies encoded within the protocol, its longevity and resilience are ensured regardless of how the markets react to it.

Deflation and Seigniorage

Seigniorage is the difference between the value of a coin and the cost of its creation. During the early stages of the Terra protocol, seigniorage was redirected to finance a variety of community-based initiatives. While seigniorage has the potential to produce immense wealth, it also has the potential to cause inflation in the system. In accordance with the Terra protocol, all seigniorage is destroyed, resulting in Luna being deflationary in nature.

Staking

Staking is the practice of tying Luna to a validator in return for staking rewards in order to strengthen the relationship between the two.

The Terra protocol only permits the top 130 validators to participate in consensus since they are ranked in order of importance. The rank of a validator is decided by their stake, which is the total amount of Luna that has been bonded to them. Although validators have the ability to tie Luna to themselves, they are primarily concerned with amassing greater stakes from delegators. Validators with higher stakes are selected more often to propose new blocks, and they receive proportionately greater payouts as a result of this.

Visit the Terra Station staking guide to find out how to stake your Luna and get staking incentives.

Why Terra?

Terra aims to distinguish itself from the competition by using fiat-pegged stablecoins. The company claims that this allows them to combine the borderless advantages of cryptocurrencies with the day-to-day price stability of fiat currency. It maintains its one-to-one peg via the use of an algorithm that automatically changes the supply of stablecoins in response to demand. As a result, LUNA holders are encouraged to switch LUNA and stablecoins at lucrative exchange rates as required, allowing the stablecoin supply to either increase or decrease in response to demand fluctuations.

Several collaborations with payment systems, notably in the Asia-Pacific area, have been created by Terra in recent years. A cooperation with Chai, a South Korean mobile payments application, was announced in July 2019. Purchases made via the application on e-commerce platforms would be handled over the Terra blockchain network, according to the partnership announcement. To compensate the merchant for this service, the price is between 2 percent and 3 percent on average for each transaction.

The Terra Alliance, a network of companies and platforms that are campaigning for the adoption of Terra, is also a supporter of the project. According to the firm, the partnership includes e-commerce platforms from ten different countries, with a combined user base of 45 million and a total merchandise value of $25 billion. The alliance was announced in February 2019 by the company.

The Proof of… question

LUNA token holders stake their tokens as collateral to validate transactions on the Terra blockchain, in exchange for rewards based on the amount of LUNA they stake. The Terra blockchain is secured using a proof-of-stake consensus algorithm based on Tendermint, in which token holders receive rewards based on the amount of LUNA they stake. It is also possible for token holders to delegate others to verify transactions on their behalf, with the latter receiving a share of any money earned. Terra also provides extra recommendations to validator nodes on the best practices to follow in order to contribute to the network’s overall security.

CertiK, a blockchain verification and penetration testing company, performed a security assessment of Terra’s mainnet in May 2019. It looked at its economic model to see whether it could withstand market manipulation, as well as its architecture and coding language. Despite the fact that CertiK determined that the Terra network’s “modeling and mathematical reasoning” were “considered solid,” the organization did not comment on the blockchain’s performance.

Price: You can check the current price of Terra on CoinmarketCap

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