Terra – Money of the Future

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Terra – Money of the Future

The following article will introduce another cryptoasset from our dynamic portfolio – the Terra platform. Terra is an algorithmic blockchain platform that uses stablecoins tied to the money from the traditional world to create a price-stable global payment system.

History

The concept of Terra was created in January 2018 with a vision to facilitate the mass adoption of cryptocurrencies by creating digital assets using blockchain infrastructure that is price-stable against the world’s most important fiat currencies. Blockchain Terra was created by the Korean blockchain company Terraform Labs with the help of the Terra Alliance, supported by 15 Asian e-commerce companies with a total of more than 45 million users.

Terraform Labs was founded by Daniel Shin and Do Kwon, who have extensive experience in e-commerce and finance. Daniel Shin is a graduate of the Wharton School of Economics and has founded several other successful companies in various industries. These include the Chai payment application, the TMON eCommerce platform, and the Fast Track Asia startup company.

What Is Terra?

Terra is a decentralised blockchain infrastructure that uses stablecoins to create an alternative stable monetary system. The Terra network has its native LUNA token while also using Oracle systems and smart contracts to enable users to use programmable internet money in real life. 

The price stability of individual stablecoins is ensured by a price stability algorithm. This algorithm ensures that the money supply of individual stablecoins is regularly updated to preserve their value. Using this algorithm, Terra strives to provide its network users with the lowest possible fees, maximum stability of individual stablecoins and their trouble-free use.

Terra Blockchain was created using Cosmos development tools and the Tendermint Proof-of-Stake consensus algorithm. Cosmos development tools are optimised to allow developers to quickly and efficiently create and run interoperable blockchain applications.

Terra blockchain transactions are settled within seconds. Furthermore, the transaction fees for the execution of smart contracts (so-called gas fees) are significantly lower on Terra blockchain than on, for example, Ethereum blockchain.

Key Characteristics of the Terra Network

The decentralised nature of the Terra blockchain makes it ideal for creating an innovative digital economy. 

Key features of Terra blockchain include:

  • Interoperability: Interoperability is the Terra blockchain’s basic and most important feature. The Terra network is designed to work and collaborate with other blockchains thanks to being part of the Cosmos ecosystem. TerraUSD currently operates, for example, on the Ethereum and Solana platforms. However, the developers of this platform continue to work hard to expand the protocol to other popular blockchains.
  • Programmability: Terra allows programmers to create smart contracts in Rust, Go, or AssemblyScript languages. Using Oracles, developers can also add additional features to their decentralised applications.
  • Financial efficiency: The main mission of the Terra network is to build a transparent financial ecosystem. For example, Terra seeks to reduce or eliminate the need to use credit cards, banks and payment gateways through a single-tiered blockchain.

Terra Stablecoins

Terra partners use Terra stablecoins to enable the use of the Terra network for retail payment services. Stablecoins are a cryptographic version of conventional fiat currencies tied to the value of real-world money. Stablecoins serve as a store of value in the volatile environment of cryptocurrencies.

Terra has launched several stablecoins that are value-linked to traditional money. The most well-known stablecoins issued by Terra include: TerraUSD (UST), TerraCNY, TerraJPY, TerraGBP, TerraKRW, TerraEUR and Terra SDR

Terra stablecoins serve as an innovative digital means of exchange between anyone and anywhere while maintaining the principle of immediate settlement and low fees.

Many Terra business partners use the Terra Station wallet to access the Terra blockchain. Terra Station supports Terra’s native token (LUNA) as well as all of its stablecoins.

Stablecoin UST and the Balancing Mechanism

TerraUSD (UST) is the best known and most powerful stablecoin built on the Terra blockchain. Following its successful launch, UST issuance began in September 2020. UST stablecoin is value-linked at a 1:1 ratio to the US dollar. There is no specific entity or firm behind the UST issue, as the UST monetary stock is controlled algorithmically, with the UST stablecoin market offering being determined by issuing or burning the LUNA token.

UST achieves price stability by algorithmically adjusting its supply according to fluctuations in demand. The increase in demand for UST will be reflected in an increase in the volume of UST’s trades and an increase in its price. As a result, Terra must develop a certain compensatory response to ensure that the price of UST remains stable. In this scenario, UST supply must be increased to compensate for the excess demand. This process is also known as expansion.

The protocol must therefore issue new USTs. Terra achieves this with naturally efficient market forces through the opportunism of individual network entities that can make a simple and risk-free profit by purchasing newly issued TerraUST (worth more than $1) for 1 UST worth the burned LUNA token. In this case, LUNA tokens are burned, and new USTs are issued, which algorithmically strikes a balance between UST supply and demand.

In the opposite scenario, a decrease in demand for UST results in a decrease in transaction activity and a decrease in the price of stablecoin UST below its equilibrium level. In this case, the UST bid needs to be reduced to keep the UST price at $1. This process in the network is called contraction.
Again, individual network users are incorporated into this process. In this case, new LUNA tokens are issued and circulating UST supply is reduced, again striking a balance between UST supply and demand.

Source: Medium

Achieving balance and price stability of individual stablecoins is therefore based on an elastic monetary policy, which, in the event of price deviations, stimulates the entities in the network to arbitrate and profit from instability.

Native Token Luna

Luna is a native token of the Terra ecosystem. LUNA is a crucial part of the ecosystem in terms of importance. The LUNA token is primarily used for the operation of security mechanisms that determine the price stability of stablecoins in the network. In addition, the LUNA token is used as a staking tool for Terra network validators through the Proof-of-Stake consensus mechanism.

Terra uses the Proof-of-Stake consensus protocol. In practice, this means that validators in the network approve new transactions and add new blocks to the blockchain. They are rewarded for these activities with the LUNA token. However, becoming a validator in the Terra network is not that easy, as the network has a limited maximum of 100 validators. In this respect, if an entity wants to become a validator, it must have a huge number of LUNA tokens. Other entities in the network can delegate their LUNA tokens to the validator and thus participate in the operation of the network and obtain passive income from it.

The governance model of the Terra network is based on community governance. This means that network validators have the right to vote on important changes and updates in the network. These updates may include, for example, various technical changes, upgrades, or changes in the fee structure. Community governance models are ideal because they provide consensual support for proposals. In addition, any validator can submit proposals for the community to vote on.

Chai

Chai is the fastest growing e-wallet in Korea operating on Terra blockchain, with more than 2.4 million active users. Chai is currently widely integrated by leading traders in Korea and also operating in an offline version by recharging Chai’s debit card and through offline retail integrations. Chai has already integrated 14 of the 15 strongest banks in Korea.

Source: Chaiscan

Mirror Protocol

One of the decentralised applications that use TerraUSD is Mirror Protocol. This protocol makes it possible to issue synthetic assets on the blockchain, replicating asset prices in real-time. This allows users, for example, to trade in synthetic assets, such as the shares of a company, without the user having to actually own them.

Source: Mirror Protocol

This protocol was designed to support the implementation of true stock exchange tradable assets on the blockchain.

The issuance of a synthetic asset requires the issuer of the asset to lock 150% of the value of the issued synthetic asset in the form of security through TerraUSD. If the price of the synthetic asset exceeds the value of the locked collateral, it will be liquidated. The price of synthetic assets is determined through oracles, which monitor stock exchange asset prices in real-time.

Anchor Protocol

Anchor protocol is another decentralised application running on the Terra blockchain. This protocol is more aimed at crypto beginners. With the Anchor Protocol, entities can use savings products from decentralised finance safely and easily.

Source: Anchor protocol

The Anchor protocol offers users low-volatility returns on Terra stablecoin deposits. This return is defined by the relationship between a lender seeking to achieve stable returns on their stablecoins and a borrower seeking to borrow stablecoins. For a borrower to borrow stablecoins, they must set up the so-called tied assets (bAssets) as collateral. After setting up the collateral, they will borrow stablecoins based on the LTV loan ratio (Loan-To-Value ratio).

Stored stablecoins are called Anchor Terra (aTerra). ATerra tokens are exchangeable for the initial deposit (initially deposited stablecoins) and the accrued interest over time, allowing users to collect interest only by depositing their free funds in the log.

Smart Money – The Money of the Future

Terra’s algorithmic money supply mechanisms are a unique and innovative asset in the cryptocurrency industry. Also, the Terra blockchain concept is inherently unique and innovative, delivering the true realisation of the essence of decentralised finance.

Terra is already very popular with traders in Korea, but it is also gaining prominence on a global scale. We can therefore expect to hear more and more about this innovative project. In addition, Terra blockchain developers plan to expand the number of blockchains on which Terra will operate. It’s already live on Ethereum and Solana, and other top-performing blockchains should be added soon.

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Juraj Forgacs

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