Cryptocurrency has come a long way in the past decade. And while flashy tokens like Bitcoin and Etherum take up most of the spotlight, these volatile coins could not function without another essential type of cryptocurrency called stablecoin.
Stablecoins are an essential part of the cryptocurrency economy. With their value tied to traditional assets like gold or the US dollar, these coins retain their worth despite the ups and downs of the market. One company that’s made a name for itself in this arena is Terra.
Table of Contents
- 1 What is Terra?
- 2 What is Luna?
- 3 How is Terra Luna Different From Other Stablecoins?
- 4 The History of Terra Luna
- 5 Is Terra Luna A Good Long-Term Investment?
- 6 Why Is Terra Luna So Popular?
- 7 What Are The Potential Risks Involved?
- 8 Where Can You Buy Terra Luna?
- 9 Conclusion
What is Terra?
Terra serves as a digital decentralized financial system. They have a central reserve, mint coins, hold reserves so their stablecoins retain their value, offer customers interest on their holdings, as well as ways to spend their Terra tokens and invest in digital stocks.
Unlike other companies, Terra has a variety of stablecoins that cater to a broad demographic of customers.
- UST backed by the US Dollar
- EUT backed by the Euro
- CAT backed by the Canadian Dollar
- JPY backed by the Japanese Yen
So if you see these acronyms thrown around on their site or other crypto forums, don’t be concerned. They all refer to Terra stablecoins based on the fiat currency they are linked to.
What is Luna?
It is important to note here that Luna is not a stablecoin, but rather the moderating force that helps Terra’s stablecoins retain USD equivalent value. In fact, it is more appropriate to call Luna a staking token. Terra’s system is fully dependent on Luna, from its stablecoin circulation to its payment systems.
This guide is going to explore each of these concepts in detail so you have a comprehensive understanding of how the Terra system functions.
How is Terra Luna Different From Other Stablecoins?
If you’ve recently entered the cryptocurrency market you may have heard of stablecoins like Tether or Binance, in other words, collateralized stablecoins. This means that the company is responsible for keeping fiat reserves equal to the coins they sell at a 1:1 dollar-to-coin ratio.
Terra’s coins don’t work like that because they are algorithmic stablecoins with their LUNA token serving as collateral. So what are algorithmic stablecoins? Put simply, Terra holds a central reserve of tokens that are managed by smart contracts. This is code embedded on the blockchain that ties into the circulating total.
The value of the coins is pegged to a fiat currency like USD and maintained through a system that relies on demand and supply forces. Terra’s algorithm maintains this equilibrium, using a burn and mint formula that relies on its token Lina. Since they are inversely proportional, when the supply of UST increases, the supply of Luna decreases.
As long as the value for 1 UST is equal to 1 USD the system is in equilibrium. If the UST value increases past one USD, the algorithm burns more Luna, so more UST is in circulation, until equilibrium is reestablished. And if the UST cost falls lower than one USD, the code mints more Luna, so there is fewer UST and its value goes back up. The system is constantly equalizing the assets (Luna) vs. liabilities (UST).
In this way Luna serves as a stabilizing force, absorbing all market volatility so Terra’s stablecoins maintain their value. As a buyer, this also means that if you hold Luna tokens you can stake the coin’s worth. Since Terra’s system depends on this contribution, holders earn a percentage of the transaction fees in exchange for stabilizing their stablecoins.
The History of Terra Luna
Terra was created by entrepreneur Daniel Shin who has dominated the field of e-commerce for several years and Do Kwon who previously worked as a software engineer for Apple and Microsoft. Both founders are active on Twitter and routinely respond to questions from their buyers.
Shin and Kwon launched the company in 2018 and introduced the LUNA token in 2019. Since then their coins have taken over the cryptocurrency market with over $6 billion in circulation as of August 2021. Terra is backed by Arrington Capital, Lightspeed Venture Partners, and Pantera Capital.
Is Terra Luna A Good Long-Term Investment?
There are many ways for interested buyers to use their Luna tokens and make a profit. As we’ve already discussed, the Luna token is essential to the Terra network as it provides the necessary collateral to stabilize their multiple stablecoins. Hence Luna’s primary role within the Terra network is as a staking token.
1. Staking Token
Staking is a term you’ll often come across as a crypto investor. It refers to a process where you commit or delegate your assets in support off a particular blockchain network and is a great source of earning passive income using cryptocurrency. This is general practice among all crypto agencies that use proof of stake models and opposed to proof of work models.
In order to protect the integrity of their system, Terra allows holders to stake their Luna token for a specific period. This allows you to showcase your longterm commitment to the Terra system. In exchange it gives you the opportunity to earn rewards and receive a percentage of the returns. The magnitude of the reward depends on the size of your stake. With larger transaction volumes you’ll receive greater rewards.
Keep in mind, however, that as long as your Luna tokens are bonded they cannot be traded. During the staking period they will only generate returns for the delegator, in this case you, and the validator. If you decide to unbond your tokens the process will take 21 days.
2. Governance Token
You can also use your Luna as a governance token. Since the Terra system is decentralized, users are constantly proposing ways to upgrade the protocols. Depending on the amount of Luna you are holding or staking you have a certain level of voting power and can influence changes within the system.
For example, the most recent system change was the Colombus 5 upgrade that had several key components. We have already discussed the burn mint system that controls the expansion of UST supply and the contraction of LUNA supply.
Earlier a percentage of the burnt LUNA tokens was used to create community reward pools. After the update this will no longer be the case and all LUNA will be burnt, making the coin scarcer and creating an increased value capture for the coin that will benefit holders greatly in the long run.
Another upgrade is called the wormhole, whereby UST will be able to transfer over or be ported to the Solana blockchain. This is another network that is growing at an exponential rate and this new way of transference will benefit both blockchains, and all the investors involved in the process. Understanding how the Terra system works will give you insight into its value as an investment option.
Why Is Terra Luna So Popular?
The sheer number of cryptocurrencies available on the market is often enough to confuse and bewilder newcomers entering the field. But this variety exists because each of these coins serves a different purpose. Bitcoin is ideal for traders wanting to invest in an asset rapidly increasing in value. It is also highly volatile, making it a high-risk high-return crypto product.
No one’s going to try and use their Bitcoin to pay for a cup of coffee or book a hotel room. That’s why you have stablecoins like Terra. These are liquid assets holders can use as they would any fiat currency. The ease of purchase and trading of course depends on how well the system is set up.
In the case of Terra, the efficiency of their Chai payment system is what makes them so popular. With over 2 million users the site funnels around $1 billion in transactions every year. Analytics at RBF Capital predicts that Terra’s stablecoins could take over as much as 20 percent of the market share by 2025.
Keep in mind that the value of a currency is directly linked to network effects. In other words, the more widespread a coin is the greater its value becomes. The fact that UST is price stable and Terra has an ample elastic money supply means this coin is on an upward trajectory.
What Are The Potential Risks Involved?
With experts at the helm, multiple big-money backers, and clean accounting, Terra is here to take the cryptocurrency world by storm. With a phenomenal growth rate, 2000 percent in one year, the metrics speak for themselves. Terra is able to communicate with multiple blockchain networks and is an independently programmable ecosystem.
All signs point to Terra Luna being an excellent investment. However, when it comes to the long term there are a few things you should be aware of.
At present, there are several different stablecoins in the market. Despite being owned by different companies they work in relatively the same way. You could say that there is a level playing field. But there is a possibility this may change in the years to come as governments across the globe consider distributing Govcoins.
Countries like China have taken the first step and are already in the production of these digital state-sponsored tokens. A US digital dollar is also in consideration by the Federal Reserve. With central bank digital currencies easily available for trading and circulation, stablecoins like Terra may take a backseat. Of course, it is impossible to predict precisely how the market will react and whether traders will be open to using these Govcoins, but it is nonetheless something to consider.
At the rate Terra is currently growing, it will soon reach the levels of widespread acclaim of coins like Tether. It is no surprise that the gatekeepers and regulators of the existing banking systems are threatened by the idea of such a decentralized financial network. Several countries have already introduced legislation banning or curtailing the efficacy of cryptocurrency.
Terra is set up in South Korea, a country that recently tighted its regulations. Now crypto exchanges need to establish partnerships with local banks in order to bypass anti-money laundering laws. Government officials in the US have also been having heated debates on the subject with high profile figures like Treasury Secretary Janet Yeller and SEC Chair Gary Gensler taking a first regulation heavy approach.
As an investor and trader you have to consider how local and international legislation will affect your ability to trade and purchase freely. This factor will affect buyers on a country to country basis.
3. Growth Rate
Terra is growing at a tremendous rate. With a 2000 percent circulation increase in just one year the metrics speak for themselves. Naturally there are questions as to whether the company will be able to keep up with this rate of growth. Many large companies end up victims of their own success if they lack the tools and facilities to manage their exponential growth.
However, with multiple big money backers and an experienced leadership team Terra is well placed to capitalize off of their recent growth. Overall, the company is on an upward trajectory and if there were ever a good time to join their legions of buyers it is now!
Where Can You Buy Terra Luna?
You can buy LUNA tokens from any cryptocurrency exchange using your fiat currencies or other crypto coins.
If you want to stake on Terra you can use the Terra Station wallet. The easy to use interface will let you know how many LUNA token you have to delegate, your current delegated and undelegated assets, as well as, any rewards you have earned.
At the end of the day, LUNA is a stablecoin, making it lower risk as far as cryptocurrencies go. The Terra network is an established blockchain on an upward trajectory. As long as you pick a decent validator with good uptime you should see solid returns from staking your tokens.
The recent Columbus 5 update was immensely successful and the Terra LUNA coin reached its peak price of $49.45 in early October. It also integrated with Cosmos, making it easier to move assets to other blockchains.