Terra Protocol was founded on the belief that mass adoption of cryptocurrencies would need to come from a network featuring an elastic money policy. Consequently, Terra built a high-speed, permissionless blockchain network where its native token, LUNA, collateralizes a cadre of stablecoins that underpin the network.
Most cryptocurrencies have a predetermined issuance schedule, meaning that the supply can inflate based on what’s written in the code. This, together with strong speculative demand, contributes to fluctuations in price. This means that using volatile cryptocurrencies as a payment method or within financial applications may be problematic because they can change drastically in value in a few days, and deferred payments specifically do not function well as they require more time.
Stablecoins have proven an inflection point of decentralized finance (DeFi) adoption, with a current circulating supply of more than $46 billion. Why?
Because stablecoins alleviate many of the limitations of TradFi and the hurdles of using crypto assets. In particular, stablecoins serve as on-ramps to crypto exchanges and other DeFi apps, are used as fast payment solutions with an immediate settlement, help hedge price-risk in volatile assets, can be accessed in many regions of the world easier than the USD, serve as better collateral for derivatives, and are deployed across DeFi apps for various other uses like yield farming.
Terra’s suite of algorithmic stablecoins, which are collateralized by LUNA, enables all of the above features but with an expanded scope. Compared to many other public blockchains, Terra’s application-specific design using the Cosmos SDK contains multiple fiat-pegged stablecoins, an FX market for swapping those stablecoins, and a mint/burn function that expands and contracts the LUNA supply based on stablecoin demand -- all baked into the protocol’s economic design.
This is powerful. Terra’s underlying design is conducive to what has become one of DeFi’s lynchpins and most demanded assets -- stablecoins. By focusing on stablecoins as the primary infrastructure, it’s not only much easier to facilitate demand for stablecoins across the network, but applications built on top of Terra also accrue value to LUNA stakers natively. The robust incentive design makes Terra an easily usable and composable network of DeFi applications ranging in scope from payments to asset management and savings.
Terra's Native Currency: LUNA
LUNA is “a mining token whose stable rewards are designed to absorb volatility from changing economic cycles.” It is used to help the protocol adjust Terra’s supply in response to changes in demand to keep Terra’s price stable. LUNA is the mining power in the Terra network, and LUNA staking represents the “pro-rata odds of generating Terra blocks.”
Basically, LUNA stakers collateralize the suite of stablecoins that Terra’s users continuously interact with and LUNA stakers are rewarded in network cash flows for doing so. As the adoption of Terra applications increases, so does the demand for stablecoins which serve as the primary vehicles for accessing these applications. In the short-term, LUNA stakers absorb the supply-side volatility of Terra’s stablecoins. In the long-term, value accrues to LUNA stakers -- incentivizing long-term investment in the network.
The supply/demand dance within Terra is accomplished via the protocol’s built-in mint/burn function. The system uses LUNA to balancer Terra’s stablecoin prices around their pegs by agreeing to be the counterparty to anyone looking to swap Terra and LUNA at Terra’s target exchange rate. For example, if demand for UST is increasing and the UST peg deviates above $1, then LUNA holders are incentivized to burn $1 worth of LUNA for 1 UST and sell it on the open market for a riskless profit.
The reverse is true when the demand for Terra stablecoins contracts -- arbitrageurs purchase UST at a discount on the open market and swap it for $1 worth of LUNA for a riskless profit.
With the recent launch of Mirror, a synthetic assets protocol built on Terra, and the upcoming launch of Anchor, a savings protocol built on Terra, the demand for UST (one of Terra’s leading stablecoins) has soared. This manifests as a contraction of the LUNA supply, which has rapidly contracted since December 2020, paired with a surging market cap for UST.
Further price appreciation of LUNA and user-friendly apps on Terra appeals to a broader set of users, feeding more demand for UST and other stablecoins on Terra, which translates to a positive feedback cycle of more investment, cash flows for LUNA stakers, and a more thriving ecosystem of DeFi applications -- the virtuous cycle.
Click here to learn more about how Terra & Luna work together on the Terra Protocol.
Latest News and Partnerships
Jump Trading Proposal Goes Lives on Terra to Increase On-Chain Swap Efficiency
Terra Raises $25 Million Fundraise Round Led by Galaxy Digital
Terra Launches $10 Million Ecosystem Fund -- Terraform Capital
Flipside Crypto Launches a Community Console for Terra
Bison Trails Partners With Terra to Become a Node Operator
Mirror Protocol Partners With Binance Smart Chain to Bring mAsset to the Binance Community
Terra Partners with Axelar To Bring Interoperability To The Terra Ecosystem
Mirror Partners with UniLend to use mAssets as Collateral in UniLend’s Money Market Protocol
Terra Proposes Money Market for Easy Finance
Terra (LUNA) is Now Available on Voyager
Terra partnered with Voyager to allow US-based users to go from USD to $LUNA in minutes by providing a direct and straightforward fiat gateway directly from their smartphones. The Voyager app is available for both Apple and Android devices. Terra Co-Founder and CEO Do Kwon stated, "Both Terra and Voyager are making crypto and blockchain more accessible for mainstream adoption. Terra's focus on merchant and payment adoption will be pushing the future-forward on blockchain-powered digital payments.”