The cryptocurrency space is gaining strength by the day and, with more stablecoin projects like Terra coming on board, there is absolutely no turning back.
In the years leading up to the introduction of stablecoins, there was rising concern about cryptocurrency’s scalability – especially giving its volatile nature. However, stablecoins, have altered people’s perceptions of cryptocurrencies in general, posing as an even more future-proof project.
Terra, as one of the most sought-after stablecoins, is intended to further reduce volatility issues associated with cryptocurrencies such as Bitcoin and Ethereum, as well as other volatile crypto assets. Just before we address the question of what Terra is, let’s take a quick look at the blockchain project’s history.
A brief history
Based in South Korea, and founded in 2018 by Daniel Shin alongside Do Kwon as the CEO, Terraform Labs is the blockchain enterprise behind the development of the Terra cryptocurrency project.
The need to develop the stablecoin, according to the founders was born out of curiosity to resolve the price-volatility issue that has plagued the crypto sector since the debut of Bitcoin more than a decade ago.
In an attempt to resolve volatility issues, Terraform thought of developing a cryptocurrency with an elastic monetary policy. This, according to the company, would ensure the digital asset’s stable price, while retaining all the censorship resistance nature of Bitcoin (for instance), as well as stay viable for everyday transactions.
Ultimately, the Terra Protocol with its balance between fostering stability and adoption represents a meaningful complement to fiat currencies, doubling as a means of payment and store of value. This brings us back to the question of “What is Terra?”
What is Terra?
Terra is a decentralised, and trustless blockchain protocol that offers support for stable programmable payment as well as open financial infrastructure development. In other words, Terra is an algorithmic stablecoin that powers the blockchain payment network at its core.
The blockchain project is designed to power the start-up’s basket of cryptocurrencies which are pegged to actual fiat currencies.
While Terra’s flagship stablecoin was its native USD-pegged stablecoin, TerraUSD (publicly addressed as UST), it has a growing list of other stable cryptocurrencies including Terra JPY, Terra GBP, TerraEUR, Terra KRW, and Terra SDR among others.
Likewise, UST currently ranks as the fifth-largest stablecoin on the market, suggesting that it is one of the fastest-growing assets in the industry, especially as it peeks above a $2.5 billion market capitalisation in less than a year of debut.
Notably, Terra’s ecosystem is made up of two primary components: the Protocol’s stablecoins, dubbed “Terra Currencies”, and “LUNA” which is the native currency used for the platform’s governance protocol as well as utility tokens.
Just before we proceed, it is important to note that Terra means ‘Earth’ in Latin, while Luna means ‘Moon’ in Latin. The reason for the naming “Terra currencies” and “LUNA” is to further buttress their reliance on each other, just as the way the Earth and the Moon rely upon each other for gravitational stability and rotation.
In context, in order to mint a new UST token, for instance, a portion of the reserve asset – in this case LUNA – is ‘burned’. Consequently, if the demand for UST rises with more adoption, more LUNA will be automatically burned as a result and diverted to the community pool. This way, the balancing act between the two assets will help ensure that stability is maintained for the pegged asset.
Furthermore, Terra wants to become the first widely used stable cryptocurrency. Hence, it is pushing adoption by leveraging a strong network of global e-commerce alliances starting with the Asia-Pacific giants like TMON, Qoo10, Tiki, Carousell and Baemin.
How does Terra Protocol work?
Terra is built on the Cosmos SDK and uses the Tendermint Delegated Proof-of-Stake (TDPoS) consensus mechanism which ensures a speedy, credible, robust, and flexible validating process. Also, of course, like most decentralised protocols, this type of consensus mechanism relies heavily on validating nodes to process transactions.
The Terra Protocol currently utilizes 130 validators who are chosen based on the amount of their delegated stakes, however, this number is projected to grow to over 300 in the near future.
Just like anywhere else, the primary role of Terra validators is to verify, settle transactions, and secure the network full nodes to commit blocks to the chain. In comparison, Terra validators play a similar role as miners in a proof-of-work consensus protocol.
In order to become a Terra validator, interested participants can either bond their LUNA tokens for a minimum of 21 days, or alternatively have other participants delegate their LUNA stakes to earn a chance to become a delegator.
On the other hand, delegators – LUNA stakers, for example – who delegate stakes to a potential validator, get rewarded after the completion of each transaction cycle. Likewise, they share the same function and responsibility as the delegated validator.
In addition, delegators are also at risk of facing the same punishment as their delegated validators in the event that they misbehave or act inappropriately. For example, both parties are at risk of losing a portion of their staked token, say, they try to execute a double-spend attack, or perhaps if they remain idle for a prolonged period.
It’s also worth noting that the TDPoS consensus method uses the ‘carrot and stick’ reward system. This means that, as previously stated, both validators and delegators are rewarded (the carrot) and suffer losses (the stick) when punishment is applied.
The reward earned by validators and delegators is accrued from transaction fees and seigniorage which is mostly earned after validators have participated in the LUNA exchange rate oracle process which requires voting.
Terra Protocol decentralisation
Although Terra’s TDPoS consensus mechanism enables optimised network performance, scalability, and interoperability, it is not the best when it comes to decentralisation. The reason for this, however, can not be far-fetch, giving the availability of limited validators on the network.
In terms of governance, Terra Protocol is primarily maintained by Terraform Labs, however, members can participate in the governing process by obtaining and staking LUNA tokens.
To this end, validators are allowed to propose changes, as well as vote for or against modifications intended for the network. Also, this implies that validators are responsible for making decisions for delegators within their downline, as there is a limited slot to participate as a validation process.
Some changes such as blockchain parameters, gas fee, reward distribution, etc., once proposed and voted by the validators are implemented automatically. However, other complex changes that have undergone the voting procedure are manually executed by the core development team at Terra Labs.
Terra token – LUNA
LUNA is the native token used on the Terra Protocol and serves as the default asset for the entire Terra network and ecosystem. The digital currency is used as collateral to ensure price stability among the platform’s basket of fiat-pegged cryptocurrencies.
While the primary function of LUNA is to lock value within the Terra ecosystem as a way of providing security for Terra currencies, it is also used in staking rewards.
The reason for this, however, is because LUNA holders and delegators are at risk of maintaining a long-term position on fluctuating assets. Hence, by staking rewards, they are eligible for incentives that sustain their interest in LUNA ownership.
Furthermore, rewards from stakes which are generated from gas fee, taxes, and seigniorage, is largely dependent on the size of the stake. And, ultimately, these rewards are generally influenced by the volume of transactions within the Terra ecosystem.
Currently, LUNA has a total market supply of 380 million tokens and as of press time, has a market capitalisation of approximately $13.5 billion with a fully diluted market capitalisation pegged at $33.6 billion.
Ultimately, Terra Protocol is well-positioned to expand beyond the crypto sphere and build a stable and intuitive ecosystem capable of promoting real-world adoption
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.