Terra is one of the cryptocurrencies that have made it to the top ten list recently. It is an unique ecosystem of algorithmic or programmable money. This ecosystem is made up of decentralized stablecoins and the LUNA Coin which is the native cryptocurrency on the Terra blockchain.
It is the first blockchain to host numerous stablecoins on its network. This article discusses what the Terra ecosystem is, how it functions and its different stablecoins.
Terra blockchain
The Terra blockchain is a decentralized, open-source blockchain for algorithmic stablecoins. Its native cryptocurrency is LUNA which powers the entire ecosystem, including the stablecoins. The ecosystem makes it easy to trade these stablecoins fast. Terra uses a Proof-of-Stake (PoS) consensus mechanism to validate transactions.
Terra aspires to be a next gen payment network that facilitates fast and cheap transactions. The network has a transaction fee cap of $1. This means that never at any point in time will the network charge you more than $1 for any transaction, no matter how much you are sending. The fees are usually a lot lower than $1, it is just the maximum it can ever be.
In addition to payment processing, Terra supports a group of stablecoins. This is what sets it apart from any other cryptocurrency or payment processing platform. With the stablecoins which are used to reduce the volatility of the cryptocurrency market, users of this platform can buy and sell without having to worry about rapid changes in the value of their money. This is why merchants are trooping to the platform to explore this potential to maximize cheap transactions.
LUNA is available on:
How Terra works
If you wish to buy something using one of the Terra stablecoins, you will need to burn LUNA of equivalent value to mint the stablecoin. UST for instance is pegged against the USD, so if you wish to mint 100 UST, you will need to burn $100 worth of LUNA to mint it. You can then buy or pay for whatever you want using the stablecoin you minted.
In the process of buying your product or service of choice, a small transaction fee is charged and shared among validators and stakers who validate transactions and keep the network secure.
Although algorithmic stablecoins such as UST and the many others supported by Terra are more susceptible to price volatility, they are primarily secured by smart contract algorithms that make LUNA for example to supplement the UST supply to maintain its 1:1 ratio to the USD value in times of volatility. Despite these concerns though, Terra has proven to be reliable as it offers real value to its users, unlike other algorithmic stablecoins that have crashed in the past.
Apart from being a platform for algorithmic stablecoins, Terra also has two protocols that allow it to be useful in other areas. The Mirror protocol allows users to own versions of other cryptocurrencies that allow them to buy things like stocks. This can be done for instance using mETH, a version of ETH from anywhere in the world and it is permissionless.
The second protocol, the Anchor protocol allows users to create savings accounts. With these accounts, you can save your stablecoins and earn returns on them. This serves as an incentive for people to save their stablecoins on Terra.
LUNA
LUNA is the native currency of the Terra blockchain and has several use cases. Unlike the stablecoins, its value changes freely just like the value of any other volatile cryptocurrency. This is why it has increased rapidly, rising to be the current 9th largest cryptocurrency by market cap.
The coin is used for staking, governance and as collateral for the stablecoins on the blockchain. As a staking asset, holders of LUNA can stake their LUNA to secure the network (since it is a PoS blockchain) and get rewarded in return as an incentive. For governance, holders of LUNA can vote on decisions concerning the development of the network. This means that the network is community-driven and those with more LUNA typically have more say on the future of the project.
Unlike other cryptocurrencies that have a maximum supply, LUNA has what is called dynamic supply. This caps the number of LUNA to 1 billion with a possibility to increase. The system keeps in check though, so that excess LUNA are burnt automatically whenever the supply exceeds 1 billion.
This stability is important because of the collateralization of the stablecoins to make sure their values remain stable.
Terra’s stablecoins
Terra supports a number of stablecoins, each of which is pegged to a different fiat currency. Examples are TerraUSD (UST), TerraJPY, TerraCNY, TerraEUR, TerraGBP and TerraSDR among so many others. As their values are stable and equal to one of the fiat currencies they are pegged to, you can use any of these stablecoins to pay for goods and services faster and cheaper than if you are using a traditional payment platform or even some cryptocurrencies like Bitcoin and Ethereum.
With the stablecoins also, Terra wishes to make available all the benefits of decentralized finance (DeFi) to its users without the volatility that is a natural part of the cryptocurrency ecosystem.
The Terra ecosystem is therefore a place where you can carry out transactions and do a lot of other things using these stablecoins without paying such high fees as found on Ethereum for instance. As long as the ecosystem continues to grow and more users come to buy UST, the price of LUNA will rise while the opposite will happen if more people sell the stablecoin. Therefore both LUNA and the stablecoins need each other to survive, which is why it is called the Terra ecosystem.
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