- Terra is unique among stablecoins due to its algorithmic design
- The Terra ecosystem consists of two tokens: Terra and Luna
- The Terra project positions the token for mass adoption in payment transactions
Terra is an algorithmic stablecoin that aims to become the first mass-adopted cryptocurrency. Terra was created using the Cosmos SDK and Tendermint, a Byzantine fault tolerant proof-of-stake (PoS) consensus algorithm. The stablecoin is secured by a second native token called Luna (LUNA). In this article, we will focus on the relationship between these two tokens that is at the core of this entire ecosystem.
Understand the difference between the two tokens
Terra Token was designed to be the currency of choice for the mainstream market. Since adoption is the name of the game, Terra’s plan is to target two specific audiences – dealers and end users.
- Merchants: Due to the complicated payment systems, merchants end up paying 2-3% transaction fees. Terra seeks to replace the existing system and bypass the need for multiple intermediaries to enable transactions with a single blockchain layer, reducing transaction fees to just 0.5%.
- End users: As Terra continues to grow, end users can enjoy a 5-10% discount for every transaction. The reason this will be possible is because of the simple supply-demand mechanics. Terra keeps its price stable by increasing and decreasing the amount of money. As Terra’s economy grows, they will be able to finance discounts with the money supply growth.
How exactly can Terra afford to offer so many discounts and cashback? To understand this, we need to look at Terra’s integrated seignorage system. Seignorage is the difference between the cost of making a currency and the real value of the currency itself. So if it takes $ 1 to create a $ 100 note, the seignorage is $ 99.
Currently, the world’s most popular stablecoin, Tether, cannot take advantage of seignorage as its algorithm uses 1 fiat to create USDT worth $ 1. With Terra, the situation is different, as the cost of producing Terra is much lower than its face value. Terra can use this to provide very rewarding cashbacks and bonuses that other payment processors simply cannot offer.
Terra has a proof-of-stake ecosystem in which Luna is the staking coin. Unlike Terra, Luna is not a stablecoin and is subject to the whims of the market. It has two main functions:
- Protect Terra from volatility.
- Reward those involved.
Protect Terra from volatility
In order to stabilize the price of Terra, Luna acts as a counterparty for anyone wishing to trade Terra and Luna at the target exchange rate of Terra.
- If the SDR price of Terra <1 SDR, users and arbitragers can send 1 Terra SDR to the system and receive Luna worth 1 SDR.
- If Terra’s SDR price is> 1 SDR, users and arbitragers can send Luna worth 1 SDR to the system and receive 1 Terra SDR.
Luna stakeholders are an important part of Terra’s network. To reward them for their services, they are rewarded with the fees (also known as “terra tax”) from all transactions. This is important because it essentially means that the stakeholders will be rewarded with real staking rewards (up to 19% of the total circulating supply). This differs from staking protocols like the one at EOS, where the stakeholders are paid by inflating the existing offer.
Predicting Luna’s Valuation – Crypto J-Curve
In his Medium article, Chris Burniske talks about the “Crypto-J-Curve”. The J-curve shows us the relationship between market sentiment and the valuation of the cryptocurrency. As Burniske puts it, the price of a crypto asset is made up of two values - “current value in use” (CUV) and “discounted expected value in use (DEUV).” The DEUV can also be viewed as the speculative value of the asset in the near future.
The above curve can be broken down into three different phases:
- The Release: There is a lot of hype soon after the project is released. For this reason, the CUV% is lower than the DEUV%. At this time, the price of the asset fluctuates greatly as it depends on speculation.
- The Obstacle: At this point, the development team is facing some obstacles. Because of this, when the hype subsides and doubts arise, the CUV% will exceed DEUV%.
- The Final Rise: Very few projects can fully enjoy this part. It takes a dedicated team, a real use case, and acceptance for a project to enjoy its ultimate promotion. In this case, both CUV and DEUV increase steadily with the assumption.
Luna’s use case and partnerships put them all in the ideal position to get the most out of Stage Three. The key to this will be CHAI.
CHAI – The Secret Behind Terra’s Adoption
CHAI is Terra’s mobile payment dApp that enables consumers to pay for items online by simply adding their bank account. CHAI went live on TMON, one of Korea’s largest eCommerce companies with 10 million users and $ 3.5 billion at GMV, shortly after the launch of Terra’s mainnet. CHAI is very well received by the community. In just three months after its launch, it has gained over 430,000 users and surpassed the more established KakaoPay in both the Apple App Store and the Google Play Store ranking. Terra recently reached one million active wallet holders, which is testament to its ever-growing popularity.
In late 2019, during Korea Blockchain Week, CHAI announced four blockbuster partnerships that could take Terra’s usage to a whole new level:
- BC Card, Korea’s largest payment processor with> 3 million affiliates.
- CU, which has 14,000 retail locations across the country and is by far the largest convenience store chain in Korea.
- Yanojla, Korea’s largest hospitality service with over $ 2 billion GMV.
- Shinsegae Duty Free, a leader in Korea’s $ 17 billion duty free shopping market.
While the Terra network is ready to hit the South Korean market, it is important to understand the differences between the two native tokens.
- Terra is the stable price coin that users can use to pay.
- Luna is the coin that works in the background and is held by the stakeholders. Luna’s main use is to protect Terra from price fluctuations.
With the popularity of CHAI dApp, more and more users are becoming part of this promising ecosystem. With these two tokens working together, the growth of the Terra network is all but guaranteed.