Terra and Luna

Blockchain and its coin

Lets make on thing clear right off the start. Terra are stablecoins that track the price of fiat currencies and also it is name of the Blockchain. Luna is a staking token which is used for governance and mining. It absorbs the price volatility of Terra stablecoins. I will talk about both of them in this article, so don’t worry.

Background

Terra was created in January 2018. Its main mission and vision is to facilitate mass adoption of cryptocurrencies. They want to achieve that by creating digital assets which are price-stable against the world’s major fiat currencies.

Terra is creation from South Korea by co-founders, Daniel Shin and Do Kwon. At the start of Terra they got the support of the Terra Alliance, 15 large e-commerce companies in Asia. These companies together process 25 billion USD in annualized transaction volume and they have over 45 million users.

Position on the market

Luna is currently ranked at the position number nine. Its market cap is $21 billion with price for one coin being $54. Terra’s total supply of tokens is 812,2 million, but its circulating supply is not even half of that, more precisely 398 million tokens. Terra hit all time low 2 years ago, on March 18 2020. Its all time high happened two months ago, on December 27 2021, when the price climbed to $103.

Staking

In a similar way, as many other cryptocurrencies, Terra also offers a possibility of staking their tokens. And with staking comes the possibility of becoming a validator. The protocol of Terra only allows up to 130 Validators to participate in the consensus and their rank is determined by their stake or the total amount of Luna which is bonded to them. Basically, Validators wich are holding larger stakes get chosen more often to propose new blocks and earn more rewards.

Pools

Because the main value of the stablecoins is derived from the stability of their price, the Terra protocol maintains the price of the Terra stablecoin by ensuring that supply and demand for it are always balanced. This is achieved by something you can imagine like two pools. First pool is Terra pool and second one is Luna pool. To avoid any volatility and maintain Terra’s price, the supply of Luna pool subtracts or adds to Terra’s supply. In the action it means that users burn Luna to mint Terra and burn Terra to mint Luna.

Expansion and contraction

We defined what are the so called pools in this environment. Now, those pools can either expand or contract. First lets talk about Expansion.

The expansion happens when the supply is low, demand is too high and price is also high. In that case, it encourages the users to burn Luna and mint Terra. This new supply of tokens suddenly makes the pool bigger and balances supply with demand. While this happens, Luna pool gets smaller so price of Luna increases.

On the other hand, Contraction comes in place when supply is too large, demand is low and price is also low. The users are encouraged to burn Terra and mint Luna. After that the same thing as during the Expansion happens, but in this case it is reversed. At the end, Luna pool increases and its price gets lower.

Fees

In Terra ecosystem, you can be Validator (Terra blockchain miner) or Delegator (user who wants to receive rewards without running a full node). Both of them can receive staking rewards. Those rewards come from two main sources.

First are Gas Fees. These fees are added to every transaction to cover the cost of processing them, and also to avoid spamming. In this case validators can set their own minimum gas fees.

Second source are Stability Fees. These fees are added to every transaction to ensure market stability. They can be divided into two types. First type is called Tobin tax. This is added as a percentage fee to any swap between Terra stablecoins. Second type are Spread fees. That is percentage fee added to any swap between Terra and Luna, with the minimum spread fee being 0.5%.

Thank you for reading.

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Štěpán Táborský

Štěpán Táborský

College student, Crypto enthusiast, working at CryptoHunters, Intern at Škoda Auto a.s.

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