The cryptocurrency sphere is undeniably volatile; the prices may change in the blink of an eye. There are thousands of cryptocurrencies in the market, and they all promise fast financial transactions. However, many lack stability, constantly growing or reducing in value.
So, the world of decentralized financial transactions needs stablecoins, tokens that exist to bring you stability, and real-time virtual use cases.
This is the function Terra has adeptly performed for two years and counting.
It is an open-source blockchain payment platform that uses a proof of stake protocol. The project essentially exists to develop stablecoins pegged to other cryptocurrencies, creating more stability.
Terra is a virtual platform for algorithmic stablecoins pegged against a fiat currency, like the U.S dollar. The blockchain also creates a safe and swift platform for users to trade, invest, and exchange these tokens.
There are many other things you can execute on the Terra blockchain. Just wait and see.
What does Terra do?
Terra was launched in 2018 to create cryptocurrencies with stable prices. It’s based in South Korea and lists the South Korean won among its peggable fiat currencies. There are many other powerful ones, too, including the Euro.
TerraUSD is the platform’s own stablecoin.
Let’s do a quick catchup for the crypto newbies. A stablecoin is a cryptocurrency whose value is pegged to that of another asset.
Bitcoin, the first cryptocurrency, was developed to reduce the need for a third party in transactions. Going to the bank or ATM every time you need cash for transactions is often a hassle, aside from the internal and external threats to your money.
Digital assets, on the other hand, will give you unmitigated access to your wealth. There’s an almost absolute guarantee that the blockchain will execute your financial transaction to any part of the globe in seconds, a luxury the traditional banking system cannot always boast of.
There are many networks or platforms that facilitate this service, including Terra.
However, the volatility of stablecoins calls for a way to stabilize their value further so that transactions can be carried out as planned. No one wants to buy a toothbrush with a highly-unstable digital currency.
So, Terra introduces a payment system to increase usability and stability for users on the platform.
Daniel Shin and Do Kwon founded the protocol to increase the adoption of cryptocurrency because they knew stability was essential for the goal to be achieved.
Terra also provides an array of decentralized finance applications for its users. Thanks to TerraUS, you can execute several financial responsibilities from any part of the world and do it in fractions.
You’ll likely hear about Terra and Luna, the pair depicting the analogy of the Earth and moon. One grows in price while the other increases in value.
While UST remains perpetually tied to a dollar value, the Luna token can rise and fall as utility increases or decreases.
How does Terra work?
Most cryptocurrency projects have their native currency.
Luna is the token developed by and for the Terra platform. The network uses the system to regulate stablecoin prices, and users rely on it for many transactions.
Essentially, you cannot use the Terra ecosystem without Luna.
Terra is Latin for the Earth, and it’s no secret that Luna refers to the moon. This was the analogy Shin and Kwon had in mind when they developed the project – it provides the needed balance to the cryptocurrency market’s volatility.
Luna is indispensable when discussing how Terra works. The protocol maintains prices by encouraging miners to mint or burn the tokens. This is the proof of stake protocol that was mentioned in the beginning.
It’s a system that uses a system of validators or computers to confirm blocks on the blockchain in exchange for a reward. This is often paid in transaction fees, which are the little charges you pay for your transactions on the blockchain.
Additionally, validators are also encouraged through the newly minted tokens. You can set up a validator just by staking the minimum number of digital coins, and you’ll make your neat profit.
Now, back to the stablecoin system – it is maintained even when utility increases. For instance, one UST will always be valued at the price of a U.S. dollar.
But again, the use cases of UST are increasing daily, so why is the value still pegged at $1? Why can’t Bitcoin and other popular cryptocurrencies maintain a stable price and finance the transactions they were developed for?
Well, it all points back to the proof of stake or validator and delegator system.
Terra employs a dual token system that leverages market forces. Validators and delegators are also essential to the success of the project.
Validators are Terra’s transaction settlers, verifiers, and means of security. On the other hand, a delegator is a Terra user who assigns their Luna tokens to a validator for use, and the payment for this service is only a certain proportion of the staked amount.
What this means is that Terra needs your Luna tokens in its liquidity pool because of the security it offers, and volunteers are always well rewarded.
The system works because the stablecoins leverage an elastic monetary policy by ensuring their supply grows alongside the fluctuating value of cryptocurrencies like Bitcoin and Ethereum.
Through expansion and contraction, Terra makes more money and provides enough UST tokens for use.
That being said, seigniorage is another unavoidable subject that’ll help you understand how Terra works. It’s the difference between the face value of money and what it costs to produce it. It’s an algorithmically controlled method to expand and contract the money supply of a listed token.
Central banks use a similar system to stabilize their country’s fiat currency. However, Terra’s protocol is different because it’s futuristic, autonomous, decentralized, and doesn’t require collateral.
Of course, it attains stability, which is the ultimate goal.
For instance, if the stablecoin is valued at $1 but drops to $0.80, its supply is higher than the demand. This is where seigniorage comes in – the algorithm uses it to buy the stablecoin, strengthening the token to help it keep up in value.
It creates the desired balance that may push the price back to $1. But if that doesn’t work, the project assigns seigniorage shares or bonds used to raise money.
By encouraging miners to mint or burn more Luna to meet the demand for UST, the price can remain constant. So, you can exchange one Luna for one UST and sell it to the Terra pool.
This stabilizes prices but also creates scarcity for Luna. This causes the value to increase, inherently maintaining the steady profit stream cryptocurrency holders are accustomed to.
Remember seigniorage? This is how you’re rewarded as a user – your willingness to overlook the risk of short-term price volatility.
Contraction happens when the liquidity pool for UST reduces. In that case, the excess is converted into Luna, which you can hold until you need it again during expansion.
Terra enjoys an efficient growth cycle thanks to the increased demand for UST. And the project is also relentless at increasing its value.
Most of the profit from the community pool will go into building more decentralized finance apps or DApps that use UST, increasing the value of Luna.
It’s easy to confuse Terra’s stablecoins with its native token. However, one is pegged to the dollar, while the other holds the value of the project. Your Luna tokens grow in worth when UST use cases increase.
TerraUS or UST is the mechanism that offers merchants stability. These are Terra’s stablecoins, which make the protocol unique and highly valuable.
Unlike Bitcoin, UST tokens can stay at the same price for more extended periods, often within the dollar’s value.
If you’re executing your transactions on the cryptocurrency market’s volatility, you’ll often be at a loss. However, the UST ensures that your wealth remains at a stable price, making it a more reasonable payment platform for conventional financial transactions.
So essentially, the TerraUS exists to offer users easy access to decentralized applications, decentralized finance, and the benefits of cryptocurrency. Think about the ease of completing financial transactions by converting some of your Luna into UST or buying it directly with fiat money.
Everyone is satisfied with each transaction. The Terra project makes its profits through the liquidity pool structure. And you get to avoid the fee credit card, and other payment institutions deduct. Additionally, the swift execution speed is also worth mentioning.
Increased use for UST causes an increase in the value of one Luna. Imagine being able to use the native token to buy gas or groceries. More people would want it because it’s a straightforward payment method.
This is where contraction and expansion come in. The growth mechanism is efficient and has served the Terra blockchain for the last couple of years. The stablecoins won’t climb above or dive below one U.S. dollar or the fiat currency they are pegged to because the excess has been algorithmically developed to be absorbed by Luna.
Luna exists to absorb the volatility of the Terra stablecoin; the Terra protocol uses it as an incentive to stabilize the UST price. You can buy one UST for $1, and it stays that way.
Essentially, it was created as a support for the incredible monetary growth the founders of the protocol envisioned.
This brings us to the question of what happens when more people demand UST tokens? Its value doesn’t increase, but more coins are created. In the same vein, the excess is then absorbed by Luna, causing it to grow in price.
You may be wondering if that’s enough to sustain the project’s growth. Well, that’s not all the protocol relies upon. There are many other ways the value of Terra increases in the cryptocurrency sphere, such as incentives given to Terra holders.
The ecosystem is so helpful that more people are buying into it. Speaking of which, the anchor and mirror protocols are techniques used to pull more users. The former is a lending and borrowing system, helping you lend, borrow, and earn interests with your tokens.
You get a 20 percent annual percentage return or APY when you deposit with the ecosystem. You can use bonded ETH or bonded Luna to facilitate the exchanges.
On the other hand, the mirror protocol is a decentralized finance platform that allows the representation or creation of other assets. It exists to facilitate traditional transactions minus the high brokerage fees.
These representations are called mAssets, and they allow you to buy almost anything from anywhere in the world. You can make your trades fractionally, too, by purchasing any of the thirteen mAssets available on the platform.
The anchor and mirror protocols ensure Terra continues to offer value to users, causing Luna to grow in price.
What is Terra Station?
You need Luna tokens to interact with the Terra ecosystem, so the project has provided a safe place to store your tokens.
The Terra station is the official wallet of the Terra blockchain. You can perform several functions on it, such as staking Luna, participating in the ecosystem’s governance, and buying and selling cryptocurrencies hassle-free.
You can also enjoy the NFT experience with the Terra station.
So far, the Terra protocol has promised easy transactions with cryptocurrencies, but can you trade every token on the Terra station? Only those supported on the network or functioning within the ecosystem can be stored in the official wallet.
The Terra station offers a gateway into the Terra ecosystem. You need it to access the numerous decentralized finance services and apps, alongside the other benefits of cryptocurrency transactions.
Withdrawing from or depositing money in the Terra Station is one of the easiest things, and you can do it on an app or through Chrome.
Instead of allowing your Terra coins to sit in your wallet, you may consider putting them to work by staking your Moons. Thanks to the Terra Station, the rewards for being a delegator are more within reach and you only need an account to get started.