Terra LUNA is a native coin of Terra, the blockchain that lets users create stablecoins fixed to real-world currencies. Users get rewards taken directly from swap fees on the Terra protocol through the process of staking LUNA. Now LUNA is considered to be one of the largest cryptocurrencies by market capitalization.
As a blockchain, Terra lets users create stablecoins - cryptocurrencies that attempt to fix their market value to an external reference, usually real-world currencies. Founded by Daniel Shin and Do Kown, who are also the founders of Terraform Labs, the South Korean company behind the Terra ecosystem, the Terra project started off after Terraform Labs obtained fundings of US$32 million. The list of its lead investors includes Binance Labs, OKEx, Huobi Capital and Dunamu & Partners, the investment arm of Seoul-based crypto exchange Upbit.
How Terra works
Terra’s stablecoins are algorithmic stablecoins, which means that the Terra protocol was designed to reach stable prices by using algorithms. The value of UST is equivalent to US$1 and remains stable position because of the LUNA token. When UST drops below US$1, LUNA supplements the UST supply to help it maintain its fix to the dollar.
For example, you want to buy a product through CHAI, one of Terra’s most popular decentralized applications. First, you’ll have to mint your own Terra stablecoin on the website. In that process, you’ll have to burn the necessary quantity of LUNA tokens. Once the stablecoins are minted, you can use CHAI’s app to purchase the product online or in-store.
Once your purchase is successful with your stablecoins, Terra blockchain generates a small transaction fee, which is distributed among LUNA delegates - token holders who decide to delegate their LUNA coin to the betting pool with the aim of securing the network.
Several factors have contributed to Terra's 20% price increase, including significant increases in the amount of money on its blockchain. With over $26 billion, Terra is, as of writing, the second biggest blockchain in terms of total value locked, according to DeFi Llama.
As it was stated, LUNA stablecoin plays a significant role in the Terra protocol. It functions as:
- A utility token - a unique token of its ecosystem.
- A way for users to participate in the platform's system of governance. By staking LUNA tokens, users can create and vote on propositions with changes regarding the Terra protocol.
- A mechanism that absorbs demand fluctuations for stablecoins minted on Terra to maintain price pegs.
- A token to stake in the DPoS consensus mechanism behind validators processing network transactions.
The maximum target supply LUNA has is one billion tokens. If the network surpasses one billion LUNA, Terra will burn LUNA until its supply returns to a steady level.
Rewards from staking
LUNA token holders have the ability to stake their tokens in the Terra ecosystem's mechanism. Before the Columbus-5 update, rewards were also taken from a portion of each swap's inflation tax. The new system provides staking yields of around 7-9%. They provide a stimulus for users and validators to participate in the Tendermint DPoS system. The principle is similar to the mining process of the Bitcoin network.
LUNA can be purchased on several cryptocurrency exchanges such as Binance. The process of buying it is the same as the one of buying other tokens on Binance - log in to your account, tap the Trade button, type “LUNA” and on the Spot tap type the number of tokens you want to purchase.
Terra blockchain has its own official crypto wallet, Terra Station. It also functions as a dashboard, providing holders of LUNA with access to their funds, and allowing them to stake and participate in governance. There is both an app for mobile devices and a browser extension for Terra Station.
The wallet is non-custodial, which means that only user has access to their private keys. The governance portal lets users create new propositions and grasp them to the voting stage if they deposit 512 LUNA. Once a new proposal is created, other LUNA holders can join and stake tokens to establish their votes.
Issues and perspective
Terra has a lot to establish to be on the same level with leading DeFi chains such as Ethereum and Binance Smart Chain. Terra stablecoins also need to catch up, although they are slowly gaining on Tether’s USDT, currently the most popular stablecoin.
One of the main issues of Terra, as called by critics, is that this blockchain is less decentralized than other networks. Its 130 validators are far outnumbered by the 3038 validators that secure the Ethereum network, for example. Another concern regarding decentralization is that the top 10 network validators currently hold about 40% of the delegated LUNA supply.
However, at the end of February 2022, Terra announced it had raised $1 billion in a private token sale, and it's now added even more cash to its reserves. On March 9, Do Kwon, the head of Terra, tweeted that the Luna Foundation Guard had added another $418 million to its stockpiles. That deal was led by various venture capital firms and raised funds for a UST Forex Reserve. This is essentially a way to ensure UST would keep its peg even in the face of crypto price volatility. It answers some of the criticisms around algorithmic stablecoins, as there are other algorithmic stablecoins that have not managed to maintain their value all the time.
Terra LUNA Collapse
In early May 2022, UST value started dropping. Thus, it was no longer pegged to USD value. New LUNA tokens were issued by the network algorithm in order to stabilize the UST. The total supply of LUNA in circulation tripled from 350 million to 1.4 billion within two days. A massive withdrawal by users of their UST funds from Anchor – the main platform for staking UST – took place.
On Thursday, May 12, Terra validators decided to halt the network at block 7,603,700. The decision was made to prevent attacks on governance. Terra blockchain restarted two hours after the halt.
- On April 25, LUNA's price was $98.
- On May 10, LUNA dropped to $26.
- On May 11, LUNA's floor price was just under $1.
- On May 12, the value of LUNA dropped by 99%.