What is Terra $LUNA: Beginners Guide
If your new, this is your guide to the blossoming and brilliant Terra ecosystem and its native token $LUNA. Hope you enjoy.
Introduction:
When you speak to anyone about the widespread adoption of cryptocurrencies in payment systems as a medium of exchange, you are most commonly met with “they are all too volatile to be used as a medium of exchange” and this is true. You cannot expect to use Bitcoin (BTC) and Ethereum (ETH) to buy your daily coffee or a sandwich for lunch. Noticing this problem, the Terra team decided to create a Blockchain focused specifically on price-stability and growth through adoption. The fundamental reasoning being that the value of a currency as a medium of exchange is mainly driven by network effects (Network effects basically means that the value of using a certain product increases as more people use it. Take the example of phones, if you’re the only person in the world with a phone it has no use but as more and more people buy phones the value and utility exponentially increases) and to achieve these network effects the currency needs to price-stable through an elastic money supply.
The Team:
As we know, the most important aspect of a cryptocurrency/DeFi project is its team. So, before we dive further into the Terra ecosystem let’s take a quick look at the team.
Lead by popular figure Do Kwon (Twitter: @stablekwon) who is the CEO & Co-founder of TerraForm Labs, the company built that built the Terra blockchain. He got a degree in Computer Science from Stanford and just a few years later he proceeded to build Terra and has been very successful in his endeavor along with his small yet very highly skilled team.
They very responsive on all of their social channels with their community and have repeatedly delivered on all their promises on their roadmap with many exciting updates to come in the future. So let’s dive further into the Terra blockchain ecosystem.
How does it work?:
Terra is a completely decentralized and open-source Layer 1 blockchain for algorithmic stablecoins and uses a Proof-of-Stake consensus mechanism for validations. But, what are algorithmic stablecoins you may ask? Algorithmic Stablecoins or Algo-stables are coins that are pegged 1:1 with an underlying currency (example: UST is pegged to USD) and this peg is maintained through demand and supply forces which are determined and adjusted algorithmically based on the usage. Terra hosts a family of Algo-stables pegged to the major world currencies such as USD, KRW, EUR, GBP, and many more. They all come under the branch of their flagship currency TerraSDR.
If you have been around the DeFi space for some time then you may know that Algo-stables are a very complex task as most of them lose their peg relatively quickly and go into the so-called ‘death spiral’ where when they lose their peg, the protocol and all its coins just shoot to 0. The most popular case being the Titan/iron death spiral. Terra so far has not faced this death spiral which is commendable, so let’s look at how Terra Algo-stables maintain their peg. I’ll explain this using UST as an example. Terra uses a mechanism called burn/mint with its native toke LUNA (more on LUNA below). So, in simple terms when the supply of UST goes up the supply of LUNA goes down (i.e. LUNA gets burned) and when the supply of UST goes down the supply of LUNA goes up (i.e. LUNA gets minted). The ratio for the burn/mint mechanism is 1 UST: $1 worth of LUNA. Also, the increase or decrease in the supply of UST is determined through the demand for protocol usage. This is basically a constant rebalancing act of assets (LUNA) and liabilities (UST).
You’ve understood one of the key components in Terra ecosystem which is the algo-stables. Now, let’s look at the other important component which is the $LUNA token. You already know that it’s used in helping maintain the peg but it has much more to it.
The LUNA token has a primary function of staking. By staking LUNA in the terra ecosystem you help secure the protocol. In staking your LUNA, you show that you have a long term belief in the project as staking periods are usually lengthy. Additionally, LUNA can also be used as a governance token. As a decentralized protocol, there are various proposals frequently posted in regards to upgrades to the protocol and based on how much LUNA you hold or stake, you have an equivalent level of voting power.
The stablecoins and LUNA can be looked at as the foundation layer of the Terra blockchain, built on top of this infrastructure is the application layer where you can have functioning DeFi apps. The most popular Dapps on Terra are Mirror Protocol and Anchor Protocol. These were just the early products that were developed on the chain. Currently, Terra has a host of different DeFi protocols with varying use cases. Just for reference, Anchor protocol is a borrowing and lending protocol much like Compound finance and Mirror protocol is a synthetic asset protocol where users can trade mAssets much like Synthetix.
More recently, The Terra ecosystem has been in the news again after making significant changes to its protocol. It’s been dubbed the Colombus-5 upgrade and we will go through everything entails below.
Colombus-5 upgrade:
To better the understand the Colombus-5 upgrade we will divide it into 4 key components (information taken from @mohakagr on twiiter):
1. Burning LUNA seigniorage
2. Stargate Upgrade
3. Wormhole Launch
4. Ozone Protocol Integration
Burning LUNA seigniorage
First off, WTF is LUNA seigniorage? Remember that burn/mint mechanism we spoke about earlier where when 1 UST is minted $1 worth of LUNA is burned which is basically the expansion of UST supply or the contraction of LUNA supply. That is basically LUNA seigniorage. However, before the upgrade a portion of burnt LUNA was directed to community reward pools. With the upgrade, ALL LUNA will be burnt. The purpose is to increase the value capture for LUNA from the growth of UST which means that in the long run, as the usage of the terra network and its stablecoins grows so will the value of LUNA by a similar amount if not more.
Stargate Upgrade
The stargate upgrade creates 3 key improvements through 4 major developments. It improves transaction throughput, cross-chain transactions, and UI development through IBC, Protobuf, State Sync, and chain upgrade module. I’ll go over each of the 4 developments below.
IBC (Inter-Blockchain Communication) at its core, is a protocol that allows communication between two separate blockchain protocol. In relation to the Col-5 upgrade it allows high TPS (Transactions per second) and cross-chain transactions. Most importantly it allows interoperability with the Cosmos chain. Additionally, it allows developers to deploy multi-chain smart contracts on the Blockchain. With the improvements IBC brings to interoperability (A DETAILED GUIDE TO INTEROPERABILITY HERE) the liquidity inflows to the Terra ecosystem will likely increase which will increase the value of the ecosystem as a whole.
The Protobuf migration also focuses on interoperability and improving the performance of the chain but is more specific to reducing gas costs on cosmos and increasing the transaction throughput. While other upgrades like state sync and chain upgrade module will help in faster node sync and asynchronous upgrades.
The wormhole
The wormhole creates a bridge between the Terra and Solana blockchain. The Solana blockchain is one that has exponentially gained traction and previously $UST could only be used on Solana if transferred as an ERC-20 token. With wormhole UST can be ported to the Solana network without any friction. This is likely to further increase the usage and growth of UST given how Solana is flourishing.
The Ozone Protocol
Ozone is basically an algorithmic mutual insurance protocol aims to provide levered coverage against technical risks in participating in the Terra DeFi ecosystem. With all LUNA from the community pool being burned and many upgrades being implemented, there is always a high chance for technical risk. The Ozone protocol aims to cover this and is currently being audited by the team and is set for launch around mid-october 2021.
The Col-5 update has been launched and has so far been a success although it’s still early days. What can be said about its long term impact is that in making these improvements to the ecosystem it has created favorable conditions for developers. The increased liquidity inflow, the increased interoperability, the increased throughput, and the well pegged stablecoins has attracted a lot more developers than ever before. There are over 80-90 Dapps that are currently in the developing and testing phase that are soon going to be deployed onto the mainnet which is going to exponentially increase the usage traffic on the Terra blockchain. The future is bright
Concluding thoughts:
According to me the Terra ecosystem is magnificent. The technology is brilliant and the community of LUNAtics who are carrying the chain forward are even better. Even if you look at it as an investment it’s a great hold. While I’m very excited about the ecosystem in its current state, I genuinely believe that it has a lot left in the tank and the future is only going to be better. We will see more innovation, more BUIDLing, and more LUNAtics. Trust the Terra and watch this space.
Hope you enjoyed this article.
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