What is Terra (LUNA)?

Stablecoins are offering users several options to choose from when making investment decisions. The value of Stablecoins as a cryptocurrency depends on external assets like the USDT or the price of gold, and it's known for its absence of volatility.

However, the value of stablecoins is not limited to fiat currency. Stablecoins can also be pegged to other assets. Terra is a popular project that deals with creating stablecoins, and it offers developers the tools to create their own pegged tokens.

How does Terra work?

Terra is a blockchain network that permits developers to create stablecoins pegged to fiat currencies through a seigniorage mechanism. Terra’s seigniorage mechanism was introduced in 2018 by Do Kwon and Daniel Shim from Terraform labs. Terra makes use of Tendermint Delegated-Proof-of-Stake (DPoS) as its consensus mechanism.

Terra’s Smart Contract capacity allows it to create a wide variety of stablecoins. The company has its headquarters in South Korea, where the project has become widely adopted for e-commerce. Terra has the Terra currencies which are tokens created in the platform and LUNA. Terra is currently ranked the 9th largest stablecoin on CoinMarketCap, with a live market cap of $27,638,032,288.

The blockchain network was created through Cosmos SDK, specializing in creating stablecoins. In Terra, Stablecoins can be converted into LUNA, Terra’s native token.

Understanding Terra Stablecoin Ecosystem

Terra offers a different approach to stablecoins. Terra stablecoins can either be backed by cryptocurrency or fiat-backed stablecoins. A collateralized stablecoin allows users to exchange Stablecoins for the value of USDT or crypto. Some of these stablecoins are BUSD and DAI. BUSD are used to maintain US dollar reserves, while DAI is a token pegged to over-collateralized cryptocurrencies.

Terra uses the algorithmic method to regulate the supply of stablecoins. In this case, each stablecoin is pegged and can be exchanged for Terra’s utility token, LUNA. For users seeking a platform to swap stablecoins, Terra acts as a counterparty. In Terra, the supplies of the two tokens swapped will be affected.

How Does Terra Stablecoins Work?

Assume you want to print $100 worth of TerraUSD (UST), which is worth 100 UST at the peg. You'll need to convert an equivalent monetary quantity of LUNA tokens to manufacture the UST. Terra will then consume the tokens you have provided. So, if LUNA costs $50 per coin, the algorithm says you'll need to burn 2 LUNA to get 100 UST. Terra previously just burnt a portion of the tokens issued, but with the Columbus-5 update, Terra now burns all of them.

Terra tokens can also be used to create LUNA. Burning 100 UST would be required to mint $100 of LUNA (2 LUNA). Even if the market price of UST is not $1 per token, the minting conversion rate treats 1 UST as equivalent to $1.

Some key features of Terra stablecoins include the validators and bonding. Validators are used to process transactions, and Terra has about 130 validators. Users stake their tokens behind a validator. The validator does a similar function to a miner on Bitcoin. It is responsible for securing the network and process. Users can choose a validator to stake their LUNA tokens from many validators. However, users should stake behind a validator that will effectively handle transactions.

Each validator is permitted to set a custom percentage of the rewards distributed to their delegators. On the other hand, bonding ensures that validators lock a set amount of LUNA for a minimum of 21 days.

Native Token - LUNA

LUNA is Terra’s native token, and it plays a significant role in the platform. LUNA is used as a utility token to pay for transaction fees. Users can participate in Terra’s governance by staking their LUNA tokens. LUNA holders can vote and propose changes on the Terra protocol.

LUNA is used to reserve the price of stablecoins and absorb volatility on Terra. Users can also stake LUNA in the DPoS consensus mechanism behind a validator processing transactions on the network. The maximum supply of LUNA is 1 billion tokens. Supply must be maintained and must not exceed the maximum supply. If the network supplies are beyond one billion LUNA, Terra will burn LUNA until the supply returns to stability.

Holders of LUNA can pay network fees, vote in elections, invest in the Tendermint Delegated Proof of Stake consensus method, and peg stablecoins. Validators and delegators stake LUNA for rewards in addition to lowering stablecoin volatility. These two individuals are critical to the network's security and transaction confirmation.

You may buy LUNA and then store it, stake it, and participate in governance with Terra Station, the Terra blockchain network's official wallet and interface. You can also trade LUNA Perpetual swaps (margined and settled in USDT) on Delta Exchange with up to 100x leverage.

LUNA holders can earn rewards when they stake LUNA in the Terra consensus mechanism. Rewards are taken from a percentage of the swap fees on the Terra platform and given to users that stake LUNA. Users are required to pay fees when they swap between LUNA and a Terra stablecoin.

What is Terra Station?

Terra station is Terra’s wallet and dashboard where LUNA holders can store their funds, access funds, stake, and contribute to governance on the platform. Terra offers a satisfactory user experience, and it is accessible on mobile devices, apps, and web browser extensions.

Terra Station dashboard shows transaction volume, staking returns, and the number of active accounts, among other things. The wallet is non-custodial, which means that your private keys are only accessible by you. Keep your seed phrase in a safe and secure place whenever you open your Terra Station wallet. However, there is no way to get your money back if you lose it.

You will be permitted to submit proposals and push them to the voting stage by depositing 512 LUNA. Other users can deposit the 512 LUNA for you if you don't have up to the tokens required. Users can also stake their LUNA to cast votes on your proposal.

You can delegate, check your payouts, bind LUNA as a validator, and participate in every stage of the DPoS consensus mechanism under the staking tokens section.

Frequently Asked Questions (FAQs)

Q1. What is Terra and how does it work? 

Answer: Terra was an algorithmic stablecoin blockchain using a dual-token model: UST as the stablecoin and LUNA as the reserve token. In May 2022, UST lost its peg and both assets collapsed, wiping out roughly $45 billion in market cap within days.

Q2. What are validators and how do they function in Terra? 

Answer: Terra used Delegated Proof of Stake, where validators staked LUNA to produce blocks and earn fees. Delegators could stake with validators for a share of rewards. A Terra Classic chain still runs post-collapse, but validator participation and network activity are minimal.

Q3. What is Terra Station? 

Answer: Terra Station was the official wallet for staking LUNA, managing UST, and accessing Terra dApps. It still functions for Terra Classic, but original LUNA and UST have no meaningful value. Most users abandoned it after the May 2022 collapse wiped out the ecosystem.

Q4. How did Terra stablecoins maintain their peg, and why did it fail? 

Answer: UST held its $1 peg by burning LUNA to mint UST and vice versa. In May 2022, a large UST sell-off triggered a death spiral: falling UST caused runaway LUNA inflation, destroying both tokens. It became the defining case against unbacked algorithmic stablecoins.

Q5. What is the current state of LUNA? 

Answer: The original LUNA is effectively worthless. A new LUNA 2.0 was airdropped in May 2022 but has seen little adoption. Terraform Labs filed for bankruptcy in January 2024. Traders looking for crypto market exposure through regulated instruments can use Delta Exchange, where derivatives trading does not require holding distressed or illiquid tokens.