What is terra
Terra is an open source blockchain payment platform for algorithmic stablecoins, which are cryptocurrencies that track the price of currencies or other assets. The Terra blockchain enables users to instantly spend, store, trade or exchange Terra stablecoins.
The Terra Protocol creates stablecoins that consistently track the price of any fiat currency (a government-backed currency such as the US dollar or euro). It is made up of two main cryptocurrency tokens – Terra and Luna – which have the following functions.
The central theses
- Terra refers to an open source blockchain protocol that powers algorithmic stablecoins and a growing network of financial applications.
- Terra also refers to one of the two main cryptocurrency tokens under this protocol, the other is Luna.
- Terra stablecoins track the price of fiat currencies such as US dollars and euros, while Luna is used for governance and mining.
- The Terra Protocol maintains the price of the Terra stablecoin by ensuring that supply and demand are always balanced. This is achieved by using Luna as a variable counterweight to the Terra Stablecoin.
Terra: These are stablecoins that track the price of fiat currencies and are named after them. For example, the basic Terra stablecoin tracks the price of the IMF’s Special Drawing Rights and is called TerraSDR or SDT. Other Terra stablecoin denominations are TerraUSD (UST), which represents the US dollar, and TerraKRW (KRT), which represents the South Korean won. Users shape new Terra by burning Luna.
Luna: Luna is used for governance and mining and is the staking token of the Terra Protocol that absorbs the price volatility of Terra stablecoins. Users put Luna on Terra blockchain miners (so-called “validators”) who record and verify transactions on the blockchain and receive rewards from transaction fees as compensation. As the use of Terra increases, so does Luna’s value.
This is how Terra works
Since the primary value of stablecoins results from the stability of the fixed price and thus the volatility typical of crypto currencies is avoided, the Terra Protocol maintains the price of the Terra stablecoin by ensuring that supply and demand are always in balance.
Luna is the variable counterweight to the Terra Stablecoin and absorbs its volatility. To understand how Terra works, imagine that the entire Terra “economy” is made up of a Terra Pool and a Luna Pool. In order to maintain the price of Terra, Luna’s supply pool will be added to or subtracted from Terra’s offering; Users burn Luna to imprint Terra and burn Terra to imprint Luna. This is achieved through the protocol’s algorithmic market module, which provides incentives to mint or burn terra through arbitrage opportunities.
Extension (of the terra pool): If Terra is trading at a relatively high price, it means that the demand for the stablecoin is higher than the supply; This means that the supply of terra should be increased to meet the demand. The protocol gives users an incentive to mint Terra and burn Luna, which results in the Terra price being lowered (by expanding the offer) and increasing the Luna price (by reducing the offer). Users continue this arbitrage process until Terra trades at its target price.
Contraction (of the terra pool): The opposite situation occurs when Terra is trading at a low price compared to its peg, which means that there is more supply than demand for the stablecoin. This would make it necessary to reduce the supply of terra until it meets demand. The protocol then encourages users to burn Terra and mine Luna, which increases the Terra price (by reducing the supply) and lowering the Luna price (by increasing the supply). This arbitrage process will be continued by users until Terra trades at its target price.
How big is Terra?
On November 14, 2001, Terra (LUNA) had a market capitalization of $ 22.6 billion, Rank 12 among all cryptocurrencies after this measure. TerraUSD ranked fifth among stablecoins with a market capitalization of $ 4.94 billion.
Example of arbitrage
The algorithmic market module of the Terra Protocol enables atomic exchanges between Terra and Luna as well as between different Terra stablecoin values. Similar to a market maker, the market module ensures that there is an easily available and liquid market for the assets of the protocol with stable prices and fair exchange rates between them.
The Market Module allows users to always trade Luna worth 1 USD for 1 TerraUSD (UST) and vice versa, which encourages users to keep Terra’s price as follows:
- When 1 UST is trading at USD 1.005 (i.e. above the USD 1 peg), users can use Terra Station’s market swap feature – Terra’s native platform for wallet, swap, governance and staking functions – to 1 USD from Luna. to trade for 1 VAT. The exchange results in Luna burning 1 USD and minting 1 UST. Since 1 UST is currently trading at $ 1.005, users can sell the 1 UST resulting from the swap for $ 1.005 and pocket the difference of $ 0.005. As multiple users participate in this arbitrage activity, the UST pool continues to grow, creating downward pressure on the UST price until it hits the $ 1 peg.
- Consider the reverse situation, where 1 UST is trading at $ 0.995 (i.e. just below the $ 1 peg). In this case, users can buy 1 UST for $ 0.995 and then use Terra Station’s market swap feature to exchange 1 UST for $ 1 from Luna. The swap causes $ 1 to be burned and $ 1 to be minted by Luna, giving the user a profit of $ 0.005. As this arbitrage activity continues, the UST pool continues to shrink, creating upward pressure on the UST price until it hits the $ 1 peg.
Terra Rewards: The Terra Protocol motivates validators (Terra blockchain miners) and delegators (users who want to receive rewards without running a full node) with staking rewards that come from two sources.
- Gas charges: Computation fees added to transactions to cover the cost of processing them and avoid spam; Validators can set their own minimum gas charges.
- Stability fees: Fees added to each transaction to ensure market stability. There are two types: Tobin tax, which refers to a percentage fee that is added to every swap between Terra Stablecoins; and Spread Fees, a percentage fee added to any swap between Terra and Luna, with a minimum spread fee of 0.5%.
Terra was developed by South Korea-based Terraform Labs, founded in 2018 by Do Kwon and Daniel Shin. The current CEO Kwon was previously employed by Microsoft; Shin is the founder and CEO of the Asian payment technology company Chai, which is a Terra partner, and was previously the founder of the Korean e-commerce company TMON.
The business reasons for developing Terra are described in a white paper of April 2019 listing Do Kwon as one of the four co-authors. The paper suggests a cryptocurrency called Terra that is both price stable and growth-oriented based on the view that a price stable cryptocurrency combines the best properties of fiat currencies and Bitcoin (BTC), while a successful new digital currency must maximize as a medium of exchange to make usable. The paper notes that there is a need for a decentralized, price-stable money protocol in both the fiat and blockchain economies, and such a protocol could be the best use case for cryptocurrencies.
Terra Luna ecosystem
In its quest to become a leading provider of e-commerce stablecoin payments and decentralized financial services (DeFi), Terra has a growing ecosystem in the crypto space with more than 100 projects in DeFi, Web 3.0 and non-fungible tokens (NFTs). These projects include:
- Anchor Protocol: A Fixed Yield Platform with Bond Yields and Smooth Access
- Andromeda Protocol: Next Generation NFT Protocol
- Chai: A payment app with over 2 million users in South Korea
- LoTerra: A decentralized lottery platform based on the Terra blockchain
- Mirror Protocol: Enables the creation of fungible assets, or “plastics” that track real asset prices
- Talis Protocol: A platform where artists can sell their creations and offer services
- Vega Protocol: A platform for the coinage and trading of derivatives
What is the Terra Ecosystem Fund?
The Terra Ecosystem Fund is used to develop applications and protocols on the Terra network. The fund is supported with US $ 150 million of the capital commitments made by major crypto investors in 2021.
Is Terra a blockchain or a cryptocurrency?
It is both. Terra refers to an open source blockchain protocol as well as the stablecoins – a class of cryptocurrencies – generated under this protocol.
Why did the SEC file a subpoena against Terraform Labs and its CEO?
On November 12, 2021, the Securities and Exchange Commission announced that that it filed a lawsuit against Terraform Labs and its co-founder and CEO Do Kwon to obtain an order directing them to comply with subpoenas for documents and testimony related to the Mirror Protocol. Terraform Labs introduced the Mirror Protocol in 2020, which allows users to create and trade digital assets called mA assets that reflect the price of US securities. The SEC is investigating whether Terraform Labs and Kwon have violated US securities laws by failing to register the offering or sale of securities, selling securities-based swaps outside of a national stock exchange, and acting as an unregistered broker or dealer.
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