What is Terra? UST and LUNA
What is Terra? : What do you think of when you hear the word ecosystem most people think of nature may be a jungle that contains plants and fungi and snakes small mammals birds bacteria and everything that requires a whole system to function on its own, all these organisms use each other to survive in different ways they are independent and they rely on each other that’s what makes an ecosystem work so if you heard the word financial ecosystem what would you think the idea is the same it’s a collection of different people organizations processes and systems that let us all buy and sell things using money to save it invest it and everything else related to finance.
Let’s take it a step further what about the phrase crypto-financial ecosystem now this is a whole new arena the crypto world may have some isolated individual projects but what it really needs is an ecosystem welcome to coinglid.com for crypto education and here we explain topics of the cryptocurrency world using analogies stories and examples so that you can easily understand them in this article we are going to explain what the terra ecosystem is how it’s currently a working algorithmic stable coin what on earth that means and what opportunities lie waiting for you to take advantage of.
So what actually is the terra blockchain in simple crypto terms, terra is a proof-of-stake blockchain intended to maximize the potential advantages of crypto for the financial world focusing on both a mass payment processing system as well as a creation of a useful stable coin let me explain the payment processing side really quick and then we’ll get on to the cool part the algorithmic stable coin so first off visa MasterCard or American Express aren’t working for nothing they actually take around two to three percent of every transaction that they help within fees that the merchants pay to the credit card company now for us this doesn’t sound like a lot but if everyone goes into a gas station and buys one bag of flaming hot Cheetos for two bucks, those fees really start to add up.
The payment processor the key here is that terra caps fees at one percent and that’s just the cap in fact fees are usually much much lower than one percent and you can see the benefits of merchants switching to the terra blockchain now you might say other blockchains and other cryptosystems have done this before but here’s what they haven’t done because other than payment processing terra has other cool features that definitely set it apart from other cryptocurrencies and even from other financial processes and products.
How does Terra (LUNA) work?
So think about this question terra uses a blockchain right and bitcoin uses a blockchain too well what’s the difference why would a merchant want to use terra when they could use bitcoin well here’s the thing bitcoin is volatile the value of bitcoin measured in dollars changes constantly I mean all-day-long this is important because we usually measure things in dollars whether that’s a bag of candy a car payment your rent everyone thinks in dollar bills, the volatility problem inspired something called stable coins.
Now we actually have an entire article on stable coins and how they work if you’re interested in learning more but the idea here is pretty simple stable coins are simply cryptocurrencies that are pegged to fiat currencies so if people have measured their wealth in this fiat currencies and they use this fiat currency most consistently they don’t want to use something like bitcoin which could change value because nobody wants to be that guy who spent 10,000 bitcoins on some pizza, at the time it may have been only 20 dollars worth but if they spend it people fear that there may be a chance it could go up and if they accept it as a purchase they also have a fear that maybe the price could go down now the core idea here is that we want to create a separate channel for one to make payments and another to invest in we don’t want them to be the same thing.
We want our money to have a stable value so that we can expect that it will be worth the same thing tomorrow and the next day and hopefully the next year terra solves this by using a stable coin an algorithm that allows certain tokens on the network to stay at a single price so terra actually has a stable coin for several different currencies like the US dollar which is represented UST, the Korean wan represented as KRT, and the euro represented as EUT now these are simple ways of using cryptocurrency to transact in a simpler faster and cheaper way than before so simply put terra is attempting to bring the advantages of crypto DeFi and all of those decentralized applications but without the volatility and unpredictability of the prices.
Now I know exactly what you’re thinking at least if you’ve read our other articles algorithmic stable coins never worked well so far terra has worked I’m gonna bring up the recent titan and iron finance algorithmic stable coin crash because it seems similar well when we dig into why they crashed it was mostly because there was no reason to hold titan or iron other than to use them to make more money and this was essentially a Ponzi scheme in the crypto world now I venture to say that terra is different because they created a stable coin with a purpose in fact terra is built around an entire blockchain ecosystem for all the daps and platforms to use while the titan was simply a get-rich-quick yield farming opportunity that was pumped and dumped on and even more so it was on someone else’s blockchain.
Think about this even Ethereum itself where does it get its value from it gets its value from the ecosystem surrounding Ethereum all the daps and the smart contracts and protocols this is exactly what also terra stablecoins are banking on as well now we may be wrong and terra may crash in the future but as far as the research that we have performed this process has worked pretty far and it does appear quite different from the titan and iron finance death spiral moving on let’s talk about how they’re similar to the terra ecosystem holds two assets at its heart the native network coin which is called LUNA and the stable coin which is called UST.
Now the power of LUNA is a bit different than in other projects because it is actually used to maintain the stable value of terra but the idea is the same LUNA is a token that is used to keep the price of terra at exactly one
dollar. It is also used for network fees let me explain how this works when the value of UST is mismatched to the value of a real us dollar basically, they use LUNA to incentivize people to do certain things to stabilize the price they do this either by burning their UST or creating more of it to manipulate the value and the people that proactively help the network stay stable are incentivized with profits alright here we go if terra is over a dollar the answer is simple you can always reduce the price of something by making more of it and that’s exactly what they do now you might be wondering who do they give all these extra terra tokens to well they give them to the people that trade-in their LUNA tokens but they do it for a very small but also important profit.
Next up what happens if LUNA goes under a dollar how do they bring it back up well if it goes under a dollar you can actually trade your terra coins in for a dollar value of LUNA again making a very small but meaningful profit this means we can basically shrink the circulating supply of terra causing the price to go up now you might be wondering the same question that I was wondering Where does all of this everlasting profit come from?
That is a great question and here’s what I found out the profit seems to come from money flowing into the ecosystem as more and more people buy UST LUNA will grow in price although it does seem to happen that a small portion of this profit goes to those who help keep UST stable however when people start taking their money out of the ecosystem LUNA will fall in price so the value is taken from people who hold the LUNA token now this brings us to another question why on earth would you hold LUNA?
Well you can hold LUNA for two reasons one if you’re bullish on the terra ecosystem and you think that more people will come into it and two if you actually want to do anything on the terra network you have to hold LUNA as LUNA is the native coin that allows you to do things so this immediately makes it very different from the death spiral that titan and iron finance experienced nobody had any reason to buy titan and iron other than to participate in the Ponzi scheme terra gets its value because people can use this stable coin for stuff all the way across the ecosystem speaking of that
What can you do with terra?
Now as we mentioned in the beginning terra is more of an ecosystem of many different crypto projects with the goal of simplifying transactions by using stablecoins and using those stablecoins to allow the use of financial tools in a way that is easier for people to understand and actually think in dollar amounts.
So terra has two big protocols called anchor and mirror first of all the mirror protocol which allows for the creation of what they call in assets basically representations of other assets is very similar to exchange-traded funds or ETH on the stock exchange.
Now that was a bunch of fancy words and here at whiteboard crypto, we like to make it simple so that basically means you can buy us stocks or precious metals like gold or even European real estate no matter where you are in the world without anybody’s permission and you can do it fractionally.
I personally think this is a great idea and it’s actually been used and working for like two years now but it does use something called synthetic assets and some experts have an issue with that overall though the mirror protocol brings people to buy LUNA and UST next up the anchor protocol uses the staking mechanism of terra to create what are basically savings accounts and right now I think they’re paying like 20 percent APY so you basically, deposit and save your stablecoins and you earn a certain percentage rate on your coins just like traditional savings accounts are supposed to work now this incentivizes people to keep their terra on the ecosystem so the way that I see it mirror gets people to use LUNA and UST and anchor keeps people.
One last thing I want to mention is that terra was actually created using the cosmos blockchain now the name isn’t really super important but it means that terra is built to be able to integrate with many other blockchains specifically for interoperability right from the foundation.
Again this emphasizes terra’s focus on an entire ecosystem of DeFi products and services and nearing the end of this article I want to ask the question what is next for terra because from the beginning this was a very ambitious project it’s in good hands and it has a lot of potential to grow tarot was created by daniel shin and do Kwan graduates of the University of Pennsylvania and Stanford respectively.
Who are each successful in their own right before creating terra now right now terra is actually targeting payment processing systems specifically in a few Asian countries like South Korea and Taiwan and it has been successful on average.
I think it saves merchants like 1.5 percent on transactions with a payment processor that uses terra and that is called chai and chai has been growing rapidly among the consumers in the Asian markets actually eclipsing bitcoin cash and even rivaling litecoin as of 2019 so as a whole ecosystem it’s possible terra could go in many different directions but they are currently targeting something similar to an incubator model basically what they’re wanting to do is invest further in different use cases of terra like the dapps which would significantly increase user growth basically, they’ve got things like mirror and anchor and they want a bunch of other dapps that will help people get users excited about using the network personally whatever direction terra takes they are going to.