While traders enjoy being invested in their cryptocurrencies. There comes time they want to convert them back to the USD. But the way it is currently structured depositing the money back in the bank is very slow specially when traders want to move their money quickly from one place to another.
This is what stablecoins are solving, which are cryptocurrencies pegged to fiat currencies helping investors use them for efficiency, making transactions and farm yield at more attractive prices.
Terra is a blockchain that enables the creation of stablecoins pegged to fiat currencies while Luna is its native token which is used for stabilising those currencies values, staking and governance.
What is Terra and Luna?
Terra is the foundation of a DeFi platform that generate stablecoins. It is a network be built for stablecoins to achieve coin stability through its ecosystem unlike other stablecoins which are backed by either the dollar or other financial instruments.
The protocol has multiple pegged to fiat currency stablecoins including UST (to the US Dollar), KRT (South Korean Won), EUT (the Euro) and much more.
The way it works is through burning mechanics of its stablecoin and its native token Luna.
Luna, Terra’s protocol native token, is used for rebalancing the stability of the pegged currency and also has utility like staking, and governance of the ecosystem.
You may wonder, why do anyone use this platform anyway?
- It is easier to keep your money as stablecoin instead of withdrawing it to the bank
- Also, as contrast Visa and Mastercard tend to charge around 2-3% while Terra capped at 1%
How do they work?
As a stablecoin
Unlike the other stablecoins like Tether USDT, Binance BUSD, or USDC which are all backed by asset reserves whether they are purely in us dollar or other assets like bank deposits or other cryptocurrencies.
UST is stabilised by its Token LUNA through a burning mechanic which always ensures that UST is traded 1:1 between its token and the pegged currency.
When the demand for UST increases and the price of UST goes above US$1. Luna holders could automatically buy UST at a US$1 price (below the UST actual price) and make risk free profit throughout this transaction.
On the other hand, if the UST price goes below US$1. UST holders are able to buy Luna with a buying power of US$1 despite it is lower than the actual price.
Throughout this process, whenever an exchange happen the other currency gets burned. So if we will buy UST1 with Luna the Luna burns to maintain scarcity in the ecosystem.
Just a quick reminder, the above example is showing the case when it is with US$. Let us not forget Terra platform also have other currencies like the Euro, Chinese Yuan, and South Korean won.
Benefit to holders
Luna token holders are able to stake their tokens in the Terra ecosystem. Staking is basically a way to prove that the holders have commitment towards this platform.
Stakers can generate reward through the stablecoin swapping, will have the voting rights as governance like voting for new currencies to be added in the future for example.
Tokens in general have rules when staked and with the case of Luna there are three type of states to the coin.
When Luna is “Bonded” it means that it is earning rewards and can’t be traded.
When it is unbonded it’s the opposite the coin is not receiving rewards but can be freely traded.
Unbonding is the state of Luna when it is being removed from the staking pool before it can be unbonded again. This takes 21 days to be completed.
Example of Terra Apps
Ok so now as a currency system, terra is making profits, with these profits the blockchain powers applications for users to use the currencies. Here are some examples:
Chai is the app to go to as the payment system between buyers and sellers. It allow users to make purchases with over 2,200 sellers and 2.8 million users
The advantage of having Chai is the lower transaction fees compared to the traditional debt and credit cards making it attractive to be used.
As users tend to exit crypto to UST but still want to generate returns, Anchor protocol helps the, achieve returns from the deposits they can make on their platform.
There are many use cases of Terra/Luna beyond the basic stablecoin ecosystem and they are always building to make more of it.
Want to buy Luna?
You can start buying Luna through Binance. And if you want to do so I would appreciate if you use my referral link as it will give both of us commission (10%)
Most cryptocurrencies have scheduled supply based on how it is coded, it is a good way to set expectations of buyers. But it still did not solve the fluctuations challenges that comes with it turning away the regular buyers who want to use cryptocurrency for purchases.
This is where I think the balancing of terra is valuable. It is still new and I would like to see how will it handle the market changes over time. As of the day of this post, this currency has crashed (11th May 2022) lets see how it goes…
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