Launched in 2019, LUNA is a native cryptocurrency of the Terra network, a blockchain project that was developed by South Korean firm Terraform Labs. The tech firm is co-founded by blockchain developers Do Kwon and Daniel Shin.
Have you recently heard of LUNA and wanted to find out more about the cryptocurrency? Or perhaps you would like to add to the knowledge you have gained on it? This Terra guide is just the article you need. You will learn, in simple terms, every detail about LUNA and its relationship with the Terra ecosystem.
We will cover the following in this Terra (LUNA) guide:
- What is LUNA?
- What is TerraUSD (UST) and how does it work?
- What are the other Terra stablecoins?
- What is Terra Station?
- Top Terra LUNA Projects
- Frequently Asked Questions About Terra, Including Is UST a Ponzi?
What is LUNA?
Terra (LUNA) is a native asset of the Terra network. LUNA holders can use the coin to pay transaction fees and can also participate in Terra’s governance system which involves suggesting and/or voting for proposed changes that can be made to the ecosystem.
They can also choose to stake their coins to earn rewards. (Read on, you’ll find out more about how staking LUNA works in the course of the article).
Similar to some cryptocurrencies such as bitcoin, LUNA coins have a limited supply. LUNA has a maximum supply of one billion coins. Once this number is exceeded, the Terra blockchain will automatically burn the excess coins until its supply returns to a fixed level.
LUNA coins can exist in three different states:
- Bonded: LUNA coins in this category cannot be traded freely. This is because they are staked or delegated to a stake pool, locked up to earn rewards.
- Unbonded: Coins in this state can be traded freely and are not committed to a stake pool.
- Unbonding: These are LUNA coins that have been withdrawn from staking or delegating. It will take 21 days to complete its withdrawal. The withdrawal cannot be canceled during the waiting period.
At the time of writing this guide that explains Terra, LUNA is the 7th-largest cryptocurrency in the world, with a market capitalization of over $38 billion.
The significant rise in value that LUNA started the year with has led Do Kwon, Terra’s co-founder, to believe that the coin would remain on that path by this time next year. He expressed this conviction in a recent bet made with crypto proponent Sensei Algod about LUNA trading above $88 by March 14, 2023.
Now that we fully understand what LUNA is, let us discuss another token that is built on Terra, the TerraUSD or UST.
What is TerraUSD (UST) and how Does it Work?
According to Terra’s white paper, the protocol was designed to become a peer-to-peer electronic cash system, one that aids online payments between one party and the other without going through a financial institution.
To make this possible, Terra deploys a suite of algorithmic decentralized stablecoins, specific types of cryptocurrencies whose value is usually attached to commodities or state-issued fiat currencies.
TerraUSD or UST is one such stablecoin. Among other stablecoins deployed on the Terra protocol, UST is the most used. Launched in September 2020, the popular scalable coin is value-pegged to the US dollar and tracks its price.
Using Dropship, a platform that helps developers enable their products on various blockchains, UST was made available on the Ethereum and Solana blockchains. It promises users a high level of scalability, interest rate accuracy, and cross-chain usage. The token also aims to solve severe scalability problems faced by other stablecoins. Some platforms that mint fungible synthetic (tokenized) assets and track real-life asset prices use UST as a pricing benchmark.
How Does UST Work?
TerraUSD (UST) is an algorithmic stablecoin. UST tries to maintain a value of $1 through the use of LUNA. LUNA is responsible for the stability of UST and all other stablecoins that are housed by the Terra protocol.
How so?
Unlike collateralized stablecoins such as BUSD and Dai amongst others, UST is not backed up by a reserve of US dollars in a bank account but by the remaining supply of LUNA coins. To create new UST tokens and keep their price anchored to $1, a percentage of LUNA tokens at a time must be burned (permanently removed from circulation.)
From this, we can deduce that LUNA and UST share a mutual relationship.
Let’s make it simple.
If, for example, you want to mint UST, LUNA coin(s) worth the amount of TerraUSD(s) you wish to create must automatically be burned. Burning a percentage of LUNA reduces the number of coins left in circulation. With LUNA having a limited supply of one billion coins, burning makes them more scarce and, therefore, more valuable.
However, minting more UST tokens has the effect of diluting the existing tokens in circulation and helps in stabilizing its price to a $1 level, a price it always strives to remain at.
In simple terms, minting new UST tokens means burning LUNA coins. Both parties benefit as they each get what they want when the mint-burn process takes place – UST gets to maintain its $1 mark, LUNA becomes more valuable.
In the Terra ecosystem, one LUNA can be swapped for one UST, and vice versa, at a guaranteed price of $1. This can still happen irrespective of the market price of either asset at the time. This means that if UST’s price surpasses or falls below $1, the swapping process can still take place.
Worth noting though is that Algorithmic stablecoins like UST are entirely new projects in the crypto industry. Never before has any method of attaching cryptocurrency to fiat currencies existed.
UST has only been here for a short period and as a result, has not witnessed major market shocks or stress. As such, it will be hard to predict how well it will do in the coming years. The token is currently the 14th largest cryptocurrency in the world, surpassing $16 billion in market capitalization.
Although UST is the most used stablecoin in the Terra ecosystem, there are several other stablecoins housed by Terra which are attached to various fiat currencies.
What are the other Terra stablecoins?
Other stablecoins on the Terra network are:
- TerraCNY is pegged to the Chinese yuan.
- TerraEUR is pegged to the euro.
- TerraGBP is pegged to the British pound.
- TerraJPY is pegged to the Japanese yen.
- TerraKWR is pegged to the South Korean won.
- TerraSDR is pegged to the International Monetary Fund.
What is Terra Station?
Terra Station is a non-custodial, hot wallet that allows one to store and manage digital funds. The proprietary wallet supports LUNA as well as all other Terra stablecoins.
Users can also use Terra Station to interact with several Terra-based decentralized applications (dApps) built on the platform to swap tokens as well as stake LUNA to validators.
Available as a decentralized application for mobile devices and as a browser extension, customers and partners of Terraform Labs reach the Terra blockchain network directly through Terra Station.
On the wallet dashboard, a range of on-chain data, including transaction volume, staking returns, and the number of active accounts is displayed.
It also contains a staking tokens section as well as a governance portal that allows users to create new proposals and take them to the voting stage by depositing 512 LUNA coins.
Top Terra Ecosystem Projects
According to data from DeFilLama, the Terra Ecosystem has over $29 billion in total value of locked assets. Below are three of some of the leading applications built on the Terra network.
Anchor Protocol
Anchor protocol is a decentralized savings, lending, and borrowing platform. UST holders on the platform deposit their stablecoins, and in exchange for doing so receive a 20 percent annual percentage yield (APY). The platform then gathers the deposited stablecoins together and lends them out to borrowers.
Worth noting is that the interest rate to be paid by borrowers to depositors is calculated using an automated interest rate algorithm based on the demand for loans and the availability of deposited assets.
To secure the loan, borrowers need to deposit their bonded assets (bAssets) on the platform as collateral. bAssets are transferrable tokens that represent the ownership of a staked asset in the Proof-of-Stake consensus mechanism. The rewards from the staked assets will serve as profits for depositors in the network.
However, if, as time goes on, the loan-to-value ratio reduces below a specified percentage, Anchor will start selling the assets to repay the loan to the depositors. The depositors, therefore, have no cause to fear losing their assets.
Let us simplify everything we have just said.
Users of Anchor can either borrow loans or deposit savings. Depositors gain a 20% APY. This yield is earned from the interest payments of the borrower which are the rewards of the collateral of the loan that was staked.
For now, Anchor Protocol accepts deposits and provides loans in only one stablecoin, TerraUSD (UST). It also accepts only two bonded assets (bAssets) as collateral for UST loans, bonded LUNA (bLuna) or bonded ETH (bETH).
Additionally, the Anchor protocol has a native crypto token called ANC. users are rewarded with ANC for deposits and borrowings.
Mirror Protocol
Mirror protocol is a decentralized finance (DeFi) application that allows users to create and trade assets that mimic or reflect the value of other real-world assets, hence the name.
These assets, called synthetics or mAssets, provide investors with exposure to the price of the real-world assets that they represent, without requiring them to own those assets.
As a result, if you, for instance, cannot trade certain assets due to lack of funds or any other reason, through synthetics that underlie those particular assets, you stand to benefit from their price movements.
Put simply, mAssets work like derivatives that let you track the value of and benefit from a real-world asset without you buying it. These real-world underlying assets could be but are not limited to major stocks and bonds traded on U.S. exchanges.
mAssets can be traded for similar assets or stablecoins on automated market makers (AMMs) such as Uniswap or Terraswap.
Although the Mirror Protocol is built on the Terra network, its assets can also be found on Ethereum and Binance Smart Chain (BSC) via bridges. Launched in December 2020, the Mirror protocol is governed by the holders of its native token called Mirror Token (MIR), as only holders of the coin can vote on changes to the platform.
To mint mAssets on the Mirror protocol, you must first deposit collateral to the protocol which would be more than 150% of the current value of the real-world asset at the time. If the value of a real-world asset rises and exceeds the value of the collateral you deposited, your collateral will be liquidated to ensure that it still meets up to the wanted value.
The collateral can also be in the form of another mAsset or any stable coin issued on the Terra network such as UST.
Interestingly, you can choose to redeem your collateral. But that can only happen by burning the mAssets issued to you in exchange for your collateral.
Like other cryptocurrencies, mAssets can be traded at any time of the day. That is however not the case with minting. Minting of mAssets can only happen during real-world market hours.
Chai
Launched in June 2019, Chai is a consumer mobile payments app powered by the Terra blockchain. The platform allows users and traders to make and/or receive payments using Terra stablecoins such as TerraKWR.
The payment app, which is restricted only to South Korean provinces, cuts out the process of going through middlemen before making payments for services.
Chai claims to offer a seamless payment experience, similar to several mainstream payment apps and credit card companies. Unlike these apps and large companies, however, Chai charges its users relatively low transaction fees.
How is that possible?
This is because it works hand-in-hand with Terra.
On the surface, (user interface), Chai looks like a regular traditional payment app. Behind the scenes, however, the Terra protocol utilizes stablecoins minted on the blockchain, something traditional payment apps cannot do, to reduce transaction fees for payments made through Chai.
Also, Terra processes transactions on Chai quickly as the merchant or vendor receiving payment is usually instantly settled, hence offering a better user experience in the Chai app.
Due to the regular payment app UI that Chai has, some of its users are essentially unaware that they are using Terra’s blockchain to pay vendors in TerraKRW.
Chai also has a debit card called Chai card. The card allows users to accumulate points and can redeem them for outsized rewards with specific merchants.
Frequently Asked Questions (FAQs) About Terra LUNA
Is UST a Ponzi?
Some people have expressed negative reviews about TerraUSD, feeling that the coin is a carefully structured rug pull. For example, earlier this year, the co-founder of MakerDAO, Rune Christensen, on Twitter termed TerraUSD a “ponzi-scheme,” stating that the coin will turn into nothing as market conditions change. Some individuals, however, do not share the same views as Christensen, believing that TerraUSD has come to stay.
Fears about Terra being a Ponzi scheme stem from the project’s algorithmic approach to backing the UST stablecoin. Critics claim that a black swan event such as increased selling pressure for UST could result in many investors dumping the stablecoin. They claim that such a scenario can easily result if Terra lowers the 20% interest rate on the stablecoin or suffers a large scale hack that might lose to the loss of public confidence in Terra.
While these fears are justifiable, Terra has moved to strengthen UST’s reserves by purchasing billions of dollars worth of bitcoin. This singular approach, as well as other strategies being devised by TerraForm to control the UST peg, might see it outlive the Ponzi claims.
Is Terra a ponzi? Investors are advised to reach their own conclusion based on the presented information.
Why is Terra buying Bitcoin?
Earlier this month, Kwon announced on Twitter that Terra was planning to acquire over $10 billion bitcoin as a reserve asset to back its main stablecoin, UST. However, as of March 31, the project has only managed to accumulate 30,700 BTC worth $1.4 billion at current prices.
In another tweet, he said: “If there is any confusion left at this point, we will keep growing reserves until it becomes mathematically impossible for idiots to claim de-peg risk for $UST. $UST is mighty.”
UST, like every other algorithmic stablecoin, was not originally designed with collateral. As mentioned earlier, collateral is Terra’s governance token that can either be minted or burned to stabilize the UST price. As a result, there have been doubts as to whether there would be enough collateral to back up the value of the coin.
This is one of the reasons why Terra is buying bitcoin, to use it as a reserve asset for UST.
Notably, the use of bitcoin as a reserve asset for UST does not make the stablecoin directly backed by BTC, since it is still pegged to the US dollar. The bitcoins will only establish an indirect peg for UST. By leveraging Bitcoin because it is a more trusted currency, Terra intends to increase the demand for UST as a deep drop in its demand could risk the stablecoin’s ability to maintain its peg.
What are the risks of staking LUNA?
One of the risks associated with staking Luna is that the present annual yield of more than 6% earned from staking could change for the worse in the future. The percentage of the yields you receive tends to reduce as time goes on.
Again, if you stake your LUNA coins and wish to withdraw them, you will have to wait 21 days before you can receive them. During this waiting period, the assets cannot be traded and you will no longer receive any staking rewards.
A notable risk for anyone who stakes LUNA is slashing. If, for instance, a validator makes a mistake during the consensus process, maybe misses a vote, suffers a network outage, or is offline for long periods, he will be penalized.
That could amount to losing part of the staked funds, including that of the delegators. In some cases, the validator could be completely excluded from consensus voting, which means that no rewards can be earned.
Find out more about Validators and Delegators below.
How does LUNA Staking Rewards work?
Holders who want to stake their LUNA have two options: to either become a validator or a delegator.
A validator uses their LUNA to verify and propose new blocks of transaction data to the Terra protocol.
A delegator decides to support an existing validator’s proposals and delegates or stakes their coins to it.
There are usually more delegators than validators because of the competition. As such, only the top 130 validators are granted the right to verify and add new blocks to the Terra blockchain. In return for their efforts, validators collect a commission fee from those that delegate coins to their proposals. That is one way they can earn rewards.
Validators can raise funds to stake from other Luna holders by delegation. The more delegators a validator has, the bigger the fund, and the higher the chance that they (both the validator and his group of delegators) will successfully propose a block.
If they succeed, they both earn rewards gained from the transaction fees of the block.
Worth noting is that LUNA holders can delegate their coins to a validator and still be able to earn rewards without needing to comply with validator requirements. Another thing to note is that for you to be able to stake your LUNA coins, you need to create a Terra wallet address using Terra station wallet.
Is Terra EVM Compatible?
At the time of writing, Terra is not compatible with the Ethereum Virtual Machine (EVM). This means that developers cannot easily deploy Ethereum-based decentralized applications on the Terra network. EVM compatibility is a future goal on Terra’s roadmap.
Is Terra LUNA a good investment?
Terra can be a good investment like most cryptocurrencies that have a thriving ecosystem. However, investors must remember that cryptocurrencies, including LUNA, are known for their volatility. Many cryptocurrencies have had their fair share of good days and dips. Like every other crypto coin, investing in LUNA has its risks but it also has its rewards. Whether or not you want to put your funds into LUNA is your personal decision to make. But don’t forget to think carefully before making an investment move.
