What is Terra?
Terra is a blockchain platform designed to issue algorithmic stabelcoins: Terra USD, Terra KRW, Terra SDT and others. The assets are pegged to the respective fiat currencies and backed by Terra native cryptocurrency (LUNA).
LUNA coins are burned for the corresponding value to issue stabelcoins. Stablecoins are exchanged for another asset via LUNA to be withdrawn from circulation. A fixed value is maintained by arbitrageurs.
The Terra network is based on the Delegated Proof-of-Stake consensus algorithm. LUNA stacking is available to users through the decentralized Terra Station app. Validators form blocks and also determine the rate of Stablecoins to LUNA by voting through the oracle module (oracle module).
Who created Terra and when?
The project was founded by Daniel Sheen in 2018 – the platform is being developed by Terraform Labs.
Shin himself is the president and founder of TicketMonster.
The launch of the core Terra network took place in April 2019. At the same time, the developers introduced the basic tools: the Terra Station wallet and the Terra Finder blockchain browser. In late 2020, they launched Terra USD (UST) and other stabelcoins.
In August 2018, the project raised $32 million in investment, with Binance, Polychain Capital, FBG Capital, Hashed, 1kx, Kenetic Capital and Arrington XRP Capital participating in the funding round.
In January 2021, Terraform Labs raised another $25 million from Galaxy Digital, Coinbase Ventures and Pantera Capital. For 2021, the company received $150 million in investments from Arrington XRP Capital, BlockTower Capital and others.
A group of e-commerce marketers created Terra Alliance to develop the ecosystem.
What tokens work on Terra?
Terra is powered by staplecoins tied to national currencies and Special Drawing Rights (SDRs): the US dollar, the South Korean won, the euro, the Mongolian tugrik, the SDR and other assets.
The UST has the largest capitalization. Terra KRW (KRT) is popular in South Korea. Terra SDT (SDT) is pegged to a basket of currencies that includes the U.S. dollar, euro, Chinese yuan, Japanese yen and pound sterling.
LUNA is the network’s native coin, providing stabelcoins and absorbing their price volatility. The issuance limit is 1 billion. LUNA is also a management token, allowing its owners to vote on community proposals.
How do Stablecoins work on Terra?
The main task of the project is to issue stable coins. The exchange between Terra stabelcoins takes place without commissions at a flat rate, but requires payment of the Tobin tax.
They are issued and withdrawn from circulation by Terra Station. LUNA is an intermediate when exchanging stablecoins for other cryptocurrencies. Stablecoins’ exchange rate to the native token is determined by validators.
To issue stablecoins in Terra Station, it is necessary to send LUNA for the appropriate amount. Previously, the process was accompanied by the burning of only a portion of the coins, with the remainder going to the community treasury. With the activation of the Columbus-5 update, the issuance of Stablecoins requires the complete burning of LUNA.
When Stablecoins are withdrawn from circulation, they are exchanged for LUNA, after which the coins can be exchanged for other assets. For example, validators set the price of LUNA at $50. If a user withdraws 100 UST, they will receive 2 LUNA, which they can then exchange into other cryptocurrencies. USTs are burned in the process.
Changes in demand for stable coins can lead to an increase or decrease in their value. The peculiarity of the platform is the market mechanism to maintain the prices of Stablecoins through arbitrage operations.
Terra Station allows stable coins to be exchanged for LUNA at the rate of the corresponding fiat currency. Arbitrators profit from the difference in exchange rates, which leads to price equalization.
Increased demand for Terra USD can cause its price to rise above $1. In such cases, market regulation of the UST value is accomplished in two steps:
Arbitrageurs release Terra USD by burning LUNA. Users spend $1 in LUNA to create one UST.
They then exchange the stabelcoins for LUNA at a market price greater than $1 and make a profit.
Arbitrageurs repeat these transactions in cycles. The supply of UST increases, causing the value to fall to the target value.
When the market is flooded with bids to sell Terra USD, supply often exceeds demand. This can cause the UST price to fall below $1. Then arbitrageurs issue LUNA coins, burning Terra USD. Then they buy UST on the market at a lower price, and then repeat the operation. In this way they restore the balance between supply and demand.
The high profits from arbitrage are the leverage that maintains the value of stabelcoins. The UST exchange rate deviated significantly from parity only three times, but arbitrageurs quickly corrected the situation.
What are the features of Terra?
Terra is built using the Cosmos SDK based on the Delegated Proof-of-Stake algorithm. Users delegate coins to validators, and the chance of finding a block is proportional to the amount of assets in the stack.
The voting results of the validators in determining the LUNA price are statistically processed. The algorithm determines the average value and the standard deviation of the rate. Based on the results, the validators are rewarded in proportion to the volume of blocked funds.
Payouts are made provided that the offered rate differs by less than one standard deviation from the average value. If the validator made a wrong suggestion, the platform penalizes him (slashing). The mechanism is implemented by reducing the amount of money that is taken into account when calculating rewards.
The platform aims to provide validators with a stable and predictable income. Validators receive gas commissions from each transaction and spread payments when transferring between Stablecoins and LUNA.
Previously, there were also stabilization fees for transfers in stablercoins. When the total value of transactions decreased, the fees increased, and when they increased, they decreased to a minimum value. Validator income remained stable when market activity declined as well as when it rose. Stabilization fees were eliminated in January 2022.
What projects are part of the Terra ecosystem?
The Terra ecosystem is growing rapidly after the release of the UST in late 2020.
Data: Loop Finance.
Terra Station allows you to interact with the network. Windows, iOS, Linux, macOS and Android versions of the app and browser extensions are available to users.
The app displays token issuance, transaction volume, staking yields and other metrics. Users use it to send/receive LUNA, Stablecoins and other assets. The wallet allows you to deposit funds into staking by delegating your share to a selected validator, as well as exchange tokens.
Data: Terra Station.
Crosschain token transfers are made through Terra Bridge. The bridge allows assets to move between Terra, Ethereum, Binance Smart Chain, Harmony and Osmosis networks.
The Terra ecosystem includes the Mirror Protocol DeFi-project. It was developed for the issuance and trading of synthetic assets. Another popular project is Anchor Protocol, which allows you to deposit funds in Terra stabelcoins. The peculiarity of the protocol is the low volatility of deposit returns.
How is Terra growing?
According to DeFi Llama, Terra’s TVL exceeded $16 billion (as of January 25, 2022). The ecosystem is second only to Ethereum. Anchor Protocol accounts for the largest TVL.
Terra’s popularity is fueled by solutions designed for crosschain steblecoin transfers. In December 2021, Multichain (formerly AnySwap), a decentralized application, added the ability to interact with the network. As of this writing, the bridge supports UST and LUNA.
StarTerra, a project launching platform, has been added to the ecosystem. The service is focused on GameFi- and NFT-applications.
To support the ecosystem, Singapore created the Luna Foundation Guard (LFG), a nonprofit organization. It builds reserves to ensure that Terra stabelcoins are pegged to the target and funds promising projects that:
- Develop open-source software for the Terra ecosystem and algorithmic steblecoins;
- engage in research and educational initiatives in blockchain, cryptography, distributed systems and DeFi;
- create solutions for community development and building a collectively managed ecosystem.
In January 2022, Terraform Labs donated 50 million LUNA (more than $3.2 billion) to LFG. The organization has already announced grant and funding opportunities.