- Terra is a smart contract blockchain built on Cosmos SDK and uses the Tendermint Delegated Proof of Stake consensus mechanism. It was officially launched in January 2018, while its mainnet came out in 2019.
- Terra’s stable coin, TerraUSD (UST), is the largest growing asset in the market and currently is also the fourth largest stablecoin in the market with a market cap of $2,214,800,172,858, according to the coinmarketcap.
- Terra aims to achieve a stable baseline interest rate via the Anchor Protocol, which provides a stable and predictable return on users’ deposits. Mirror Protocol by Terra eases the creation of Synthetic assets called mAssests.
Terra: A Brief Explanation
Terra is a smart contract blockchain network created using Cosmos SDK and aims to render a financial ecosystem that is decentralized and maximizes the potential of crypto and is algorithmically governed.
Each Terra stablecoin is convertible into LUNA, the network’s native token, rather than using over-collateralized or fiat-crypto as reserves.
Terra was developed in January 2018 by Terraform Labs, which is a Korean Blockchain enterprise founded by Daniel Shin and Do Kwon, graduates of the University of Pennsylvania and Stanford, respectively. Terra officially launched its mainnet in 2019.
Terra uses the Tendermint Delegated Proof of Stake (PoS) consensus mechanism, open-source software that lets users launch their blockchain and code and build applications in any language.
How Does The Terra Protocol Work?
Terra has gathered a large user base in South Korea, where its headquarters is, and in general, it is quite popular in Asian Markets.
For instance, the taxi users in Mongolia use Terra MNT, which is pegged to Mongolian tugrik, for doing transactions.
Terra also announced its collaboration with a South Korea-based mobile payments application called Chai, in July 2019, under which the purchases made through the application on e-commerce platforms are transferred using the Terra Blockchain Network. Also, along with each transaction, a 2%–3% fee is charged to the Merchant.
Tokens minted on the platform are called Terra currencies, and they exist alongside the network’s native token for governance and utility token, LUNA.
Currently, the network relies on a set of 130 validators, in the future, the network is anticipated to see an increase of 300 validators.
Terra validators verify and settle transactions and also secure the network by running full nodes to commit blocks to the chain. In simple words, Validators help maintain the consensus and secure the network. It can also be understood that the validators of proof of stake (PoS) based blockchains and miners in proof of work (PoW) blockchain play a similar role.
Users who want to do mining either have to bond their own LUNA token for at least a minimum of 21 days or have other users delegate their LUNA stakes.
LUNA stakes, in return, can delegate their tokens to become delegators.
Delegators and Validators essentially perform the same function, enjoy the same benefits and carry the same responsibilities.
It means that while delegators get to earn a portion of the fees from the validators, however, there is also the risk of losing the funds if the validators to whom they’ve delegated their stakes misbehaves.
Also, if the validators try to remain inactive for a long time or try to execute a double-spend attack, it can result in their staked tokens being slashed.
Terra stablecoin
Typically, collateralized stablecoins allow their token holder to exchange the stablecoin for an equivalent amount of fiat or crypto. BUSD or DAI, which is backed up with over-collateralized cryptocurrencies, are examples of Collateralized stablecoins.
However, Terra’s stablecoin for controlling their supply uses algorithmic methods. For anyone who wants to swap their stablecoin for LUNA or vice versa, Terra acts as a counterparty and also affects the two tokens’ supplies.
It offers stablecoins pegged to South Korean won, the U.S. dollar, TerraJPY, TerraGBP, TerraKRW, TerraEUR, Mongolian tugrik, and a bunch of currencies from the International Monetary Fund’s Special Drawing Rights as of September 2021.
TerraUSD (UST), Terra’s stable coin, is currently the fourth largest stablecoin and the most significant growing asset in the market, according to the CoinMarketCap, and has reached a market capitalization of $$2,214,800,172,858 since its launch in September 2020.
Terra stablecoins provide a seamless cross-border value exchange and quick swaps between one another, along with employing instant settlement, and anyone can use it in any location at a negligible amount of fees.
Terra’s stablecoins achieve price stability using the elastic monetary policy, that is, by adjusting their supply according to the real-time fluctuations in demand.
How does Terra stablecoins work?
Let’s understand through an example if you want to mint $1000 TerraUSD that is equal to 1000 UST at the peg. First, you will need to convert an equivalent amount of LUNA tokens if you wish to mint the UST. Terra then burns the tokens you supply. For example, at the time of writing, the price of LUNA is $88.43. Terra would burn 11.24 LUNA to mint 1000 UST.
Terra used to burn only a specific portion of the tokens, now 100 % is burned after the introduction of the Columbus-5 update.
Users can also mint LUNA with terra tokens. To mint $1000 of LUNA, users will have to burn 1000 UST.
It doesn’t matter if the market price of UST is not $1 per token; the conversion rate for minting will be 1 UST as equal to $1. This exchange mechanism is the reason behind the price stability of TerraUST.
If the price of UST is above $1, they can burn one LUNA to get $1 worth of UST, and if the price of UST is below $1, they will burn $1 worth of UST to get one 1 LUNA. In the process, they collect “seigniorage.”
Overview Of Luna
Terra cryptocurrency does these four different things on the platform:
- LUNA is a utility token, i.e., used to pay transaction fees in its gas system.
- By staking their LUNA tokens, users can also participate in the platform’s governance, which you can do by staking your LUNA token and acquiring voting power regarding the changes in Protocol.
- A volatility absorber for the price of stablecoin is also minted on Terra.
- It is also used as a token in the DPoS consensus mechanism behind the network’s transactions processed by validators.
LUNA’s Staking Rewards
LUNA token holders can stake their tokens in the Terra ecosystem’s consensus mechanism.
Users earn rewards that are taken directly from swap fees on the Terra Platform by staking LUNA. Anytime a user switches between LUNA and a Terra Stablecoin, they pay these fees.
Before the Columbus-5 update, rewards were taken from a part of each swap’s seigniorage. In theory, the new system should be providing staking yields of around 7-9%.
Validators and Users receive an incentive from these rewards for taking part in the Tendermint DPoS, and the mining process is almost similar to the Bitcoin network.
Anchor: A Simple Protocol With Stable Gains
Federal Funds Rate is the Target leading rate that the Federal Reserve (the Federal Open Market Committee or FOMC) enact for banks who in turn lend to other banks overnight.
Broadly, the Federal Funds Rate acts as a benchmark for interest rates and also affects any financial institutions or consumers who lend or borrow money.
A stable baseline interest rate will be quite an achievement for DeFi in general. Terra has come forward and is trying to achieve precisely that via the Anchor Protocol, allowing participants to receive a predictable and stable return on their deposits.
Right now, Terra is providing 20% that might be considered low. However, it renders users stability and a stress-free mind. Besides, institutions that are risk-averse but also looking to enter into the crypto sphere are more likely to get attracted by the predictable interest rates.
Mirror Protocol: A Synthetic Asset Network
Mirror Protocol, a DeFi protocol, eases the creation of Synthetic assets, known as Mirrored Assets( or mAssets), and is on the Terra Network.
The mAssets imitate real-world assets, providing worldwide exposure to users who trade these assets without owning them.
Mirror Protocol ensures that there is enough collateral within the Protocol for covering mAssets and users mint mAssests by opening a position and depositing collateral.
Mirror also works as a market maker by listing them on Terraswap, an automated market maker (AMM) protocol inspired by Uniswap, against UST.
Users who provide liquidity to the Protocol by staking their LP tokens get the mirror token (MIR) as a reward token that Terra mints for them. Users are also rewarded MIR if they stake sLP tokens by shorting mAssets to fluctuate the real-world price behavior.
MIR tokens holders can take part in the governance of the Protocol and also receive a portion of Mirror Protocol’s withdrawal fees.
What Does The Future Look Like For The Terra Ecosystem?
Terra aims to become the leading e-commerce stablecoin payment in the crypto sphere. So far, Terra has been quite successful in creating a financial ecosystem that seeks growth strategy and adoption from the real world. It uses blockchain technology; however, it is not volatile like a crypto king, Bitcoin. Another Terra’s moat is that it has separate payment channels and invests in an asset.
Terra has solidified its position in the crypto world by rendering a stablecoin that is scalable and interoperable, UST, a protocol that offers seamless synthetic stock exchange trading, Mirror Protocol, and an Anchor Protocol that ensures stable and predictable returns.
At the time of writing, Terra is the 9th leading cryptocurrency according to the CoinMarketCap, with a Market Cap of $2,209,198,987,251 and stands at a price of $88.46, leaving blockchain projects like Avalanche and Polkadot behind.
CEO of Pantera Capital, Dan Morehead, also seems to agree with us as quite recently; he was heard saying that Terra ($LUNA) is a “promising” cryptocurrency project with “plenty of room to grow, although its price boomed 13,700% year-to-date, surpassing the market cap of $31 billion.
There is no doubt there are plenty of opportunities for Terra in 2022 & beyond, as it can leverage its cross-chain compatibility with other Cosmos SDK blockchains. It would also not be shocking if Terra evolves as the global DeFi System in the coming years and grows outside its Asia base.