Cryptocurrencies
15
Feb
terra luna

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Terra LUNA and UST

Terra is one of the biggest smart contract platforms on the market. Both LUNA token and UST stablecoin gained massive popularity in 2021. This article is a beginner’s guide to Terra. We’ll dive deep into Terra’s history, technology, and stablecoins.

Note. This article was written before the collapse of Terra Luna in early May 2022. This information shouldn’t be used to learn about the project. If you want to learn all about the collapse of Terra, check this article.

Terra is a Proof of Stake blockchain

Let’s first place Terra into the correct cryptocurrency category. We divide cryptocurrencies into three clear subcategories: currencies, platforms, and tokens.

The best-known representative of the currency category is Bitcoin. Currencies have no other significant purpose than transferring or storing value. Other well-known currencies are Litecoin and Monero.

The platform category includes various smart contract platforms that can be used to build decentralized applications (Dapps). Platforms include Ethereum, Solana, and Avalanche, for example. Platforms can be thought of like iOS and Android.

Tokens are issued on the existing platforms and do not have their own blockchain. Tokens are usually either utility tokens or governance tokens. Aave and Chainlink are two popular tokens.

It is easy to place Terra into the platform category. It became one of the top challengers of Ethereum in 2021. Even if Terra is a proper smart contract platform it’s best-known for its algorithmic stablecoin UST. We’ll dive deeper into this topic a bit later.

Some of the readers might have already noticed the wordplay here. Terra and Luna refer to earth and moon.

Terra is the name of the project and the network while LUNA is the name of the token. You should say “I’m investing in Terra” or “I bought some LUNA” instead of “Terra Luna”.

LUNA is the native token of the Terra. It is used for staking and paying transaction fees in the Terra ecosystem. LUNA is also used for creating UST stablecoins. Hence, it has more uses cases than a typical native token of a smart contract platform.

Terra wants to solve the crypto payment issue

Terra has its roots in South Korea. The project was created by a blockchain company Terraform Labs in January 2018. Daniel Shin and Do Kwon are the two founding members. Both have studied economics and computer science at prestigious U.S. universities. Do Kwon has become the public face of the project.

Terraform Labs is responsible for the development of the Terra platform, such as programming and other work related to the technology. The project is coordinated by Luna Foundation, which is a non-profit organization. Many crypto projects are organized in a similar fashion.

Terra was able to raise tens of millions of dollars in a private investment round in 2018. They also raised over 60 million dollars from an ICO held in early 2019. Terra has also received hundreds of millions of dollars from famous VCs in the past year or two. The funding of the project won’t surely be a problem.

Terra’s MainNet was released in April 2019. At the same time, the project introduced the KRT stablecoin, which follows the price of the South Korean Won. KRT stablecoin is already used in dozens of different applications. The largest of these is Chai, which is said to have more than 2 million users.

In September 2020, Terra started to issue UST stablecoin. It is pegged to the U.S. dollar. Demand for UST began to grow rapidly in December 2020, when the Mirror Protocol started operating. Mirror Protocol enables the trading of synthetic assets.

terra mirror

Terra’s popularity has also been boosted by other DeFi applications. One of the best-known examples is Anchor Protocol, which offers up to 20% APY for stablecoin deposits.

The year 2021 has been a huge success for Terra and its LUNA token. At the beginning of January, the project wasn’t even in the top 50 rankings with a market cap of $400 million. Terra’s market cap blasted through 36 billion dollars in December 2021.

The LUNA token has been one of the top 15 cryptocurrencies since late 2021. Below is the graph of LUNA’s price development.

terra-luna-price

The market cap of the UST stablecoin has also grown massively. It was just 150 million dollars in January 2021. Now, UST is worth 11 billion dollars. It has become the fourth biggest stablecoin in the market after USDT, USDC, and BUSD. It looks likely that UST will overtake BUSD too in 2022.

At the time of writing, Terra is the second-largest DeFi platform in the market measured by TVL (Total Value Locked). Only Ethereum is larger.

Terra has also seen some major improvements in 2021. The Columbus-5 update in October 2021 was the most important one. It improved LUNA’s tokenomics by burning all tokens used to mint UST. Terra’s staking rewards were also improved and support for the Cosmos IBC protocol was added. This makes it possible for Terra to connect with other Cosmos-based blockchains.

You can check more recent updates from this Coin Bureau video.

Terra is a platform built with Cosmos SDK

Let’s dive deeper into Terra’s technology.

All major competitors of Terra are smart contract platforms using a Proof of Stake consensus algorithm. Ethereum is the only exception to the rule, but not for long. Ethereum will become a PoS platform in 2022 as well.

Terra is built with Cosmos SDK. THORchain and Binance Smart Chain are other popular blockchains built like this. The abbreviation SDK means a software development kit. It’s a collection of tools and components a software developer can use without having to build everything from scratch.

cosmos sdk

The Cosmos SDK is using a Proof of Stake algorithm called Tendermint. It is created by Cosmos as well. In a system like this, a new block is created every six to eight seconds. Tendermint also enables instant finality meaning there are no confirmations after a transaction is sent. Each transaction is regarded as final once it’s recorded in the blockchain.

Terra’s capacity is about 10,000 transactions per second, which makes it a very competitive platform. Transaction fees are just cents of a dollar.

In a PoS consensus validators are maintaining the blockchain instead of miners. In Terra’s ecosystem, the number of validators is limited to 130. Each validator must stake Luna tokens. There is no minimum requirement for staking, but the system always chooses the top 130 nodes that have staked the most Luna. Small investors can delegate their LUNA tokens and collect staking rewards.

Terra’s validators act also as oracles. It means nodes that are tracking the price of Terra’s stablecoins.

Luna is the native token of Terra. It has the same use cases as native tokens of competing platforms meaning staking and paying transaction fees. Luna is also needed to issue Terra’s stablecoins. More about this in the next chapter.

Luna is also a governance token. Holders of Luna can vote for protocol upgrades.

The challenges of stablecoins

Terra is known for its stablecoins. It is trying to solve the issues of traditional stablecoins with an algorithmic stablecoin solution. The fiat peg in Terra’s stablecoins is achieved with incentives instead of using fiat or crypto as collateral.

The problem for the most popular stablecoins (USDT and USDC) is the lack of transparency and decentralization. The U.S. government could command Circle (the issuer of USDC) or Bitfinex (USDT) to shut down their stablecoins.

Another issue is the lack of proper audits. No one really knows what assets are backing these popular stablecoins. The picture below is a report published by Tether about its reserves from spring 2021. Note the small percentage of treasury bills and cash.

tether reserves

The problem with the third popular stablecoin, DAI, is its relation with Ethereum and ETH. DAI has long been secured by ETH, so Ethereum volatility has also threatened the stability of DAI.

MakerDAO, which issues DAI stablecoin, has recently sought to mitigate this effect by giving the USDC a greater role as guarantor of DAI. The problem here again is the decentralization. Issuing DAI can also be very expensive due to Ethereum’s high transaction fees.

Terra’s algorithmic stablecoins

Algorithmic stablecoins have existed before Terra. These projects have almost invariably failed due to a lack of popularity. Also, algorithmic stablecoins have failed to track the price of the U.S. dollar accurately enough.

Terra’s UST stablecoin has succeeded by creating a system where the value is defined by supply and demand. This is where the Luna token is needed. In order to issue one UST, a user must spend Luna tokens worth one dollar. The Luna used here is then burned out of circulation.

The video below explains how Terra’s stablecoin issuance works.

 

Example: What happens if the price of UST goes up by 5% to $1.05? LUNA token owners can use arbitrage to switch their LUNA tokens to UST stablecoin, after which they can sell their UST’s on the market for a 5% higher price.

The same logic works in an opposite situation. If the UST loses 5% of its price, UST holders can burn their UST and trade it for LUNA. This in turn will drive UST demand and shift it towards the value of $1.

All stablecoins created on Terra’s platform follow a similar incentive algorithm. This balance between stablecoins and LUNA tokens reflects the relationship between the Earth (terra) and the moon (luna), in which both rely on each other’s weight forces and rotation.

Terra Luna as an investment

Terra’s Luna token didn’t really hit the mainstream until late 2021. It has gained popularity due to the huge demand there has been for the UST stablecoin. Previously mentioned DeFi apps, Mirro & Anchor, have also contributed a lot. It must be said that Terra looks like a strong project at the moment.

The Luna token is the ninth biggest cryptocurrency at the time of writing this article. Only ETH, BNB, ADA, and SOL are bigger smart contract platform native tokens. UST has become the fourth largest stablecoin. It will probably overtake Binance USD in early 2022. Terra is also the second-largest DeFi platform in liquidity.

Terra’s ecosystem is growing fast. There is lots of money behind the project from the biggest VCs as well.

There should be room for the Luna token to grow. When we look at the market cap, it’s only about one-third of Binance Coin’s market cap and 57% of Cardano. Luna has also the advantage that it’s needed for issuing UST. Other platform tokens don’t have this use case.

Every investment has its pros and cons. If you want to know what’s wrong with Luna, check the video below starting at 17:57.

Coin Bureau highlighted in March 2021 some ambiguities in the Luna allocation. Instead of a public ICO, Terra only had a private sale in early 2019. Private investors included Binance, Huobi, OKEx, and a few VCs. According to Coin Bureau, it is unclear how many LUNA tokens were originally issued.

The token allocation also reveals that only 4% of all Luna tokens were reserved for the public. A significant part of the tokens was distributed to insiders. The last vesting periods on these tokens will end in the spring of 2022.

It is also unclear how U.S. regulators will see Terra’s stablecoin. Since UST is algorithmic, it is difficult for any authority to just outright ban it.

However, Luna’s fiat on- and off-ramps could be made more difficult to access if it were to be classified as a security. This could force popular cryptocurrency exchanges to remove the token, which would mean a significant loss of liquidity.

We saw a hint of possible issues at September’s Mainnet 2021 event in New York, where Do Kwon was sued by the U.S. Securities and Exchange Authority (SEC) just as he was about to have his speech. According to many sources, this was specifically related to Mirror Protocol.

Terra LUNA price and how to buy LUNA

Terra’s Luna token is available in the biggest crypto exchanges. We recommend using the market leader Binance, which gives you the best liquidity and lots of different trading pairs.

Buy Luna from Binance

KuCoin and Kraken are other popular exchanges listing the Luna token.

If you want to swap USDC to UST and generate 20% returns on Anchor Protocol, the UST stablecoin can be found in KuCoin and Coinbase (ERC-20 version) as an exchange pair for USDC. To use Anchor Protocol, you must first install the Terra Station wallet.

LUNA tokens can be stored not only in the Station wallet but also in the Ledger Nano X cold wallet or Trust Wallet mobile wallet.

Terra’s official website can be found at terra.money and their Twitter account is @terra_money.

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