Terra [LUNA]: a stablecoin issuing ecosystem

We continue to study platforms used for creating different blockchain projects: stablecoins, DeFi, synthetic assets. Today on the agenda is Terra [LUNA].

On July 16, the Terra [LUNA] crypto project team announced that it had received $ 150 million in investments to develop its ecosystem. The investments came from a pool of 23 large funds specializing in the blockchain industry (including Arrington XRP Capital, BlockTower Capital, Galaxy Digital, and Pantera Capital), and were received by Terra Ecosystem Fund. The purpose of this round of investments was to both attract new projects to the network and develop existing ones.

Terra Ecosystem Fund would serve as an intermediary through which developers of applications for Terra gain access to large investments. Through the fund, the developers are also able to interact with investors, which allows them to exchange experience, while fund employees can participate in application development.

To qualify for money from the fund, the project must be built entirely on the Terra [LUNA] blockchain and integrate Terra stablecoins into its operation. Part of the money will be used to reward users for writing articles, guides, and instructions on using the Terra ecosystem and its profit-making tools.

Today, there are already dozens of Terra-based decentralized applications. The project also released 16 stablecoins pegged to various fiat currencies, which is the main focus of its work. Dozens of other Terra-based projects are currently in development, mainly DeFi applications, payment services, wallets, and decentralized games.

The Terra [LUNA] protocol itself was originally created to issue stablecoins using an original mechanism to ensure the stability of their exchange rate. The project also has a platform for creating and trading synthetic assets.

Here it should be mentioned that the Terra [LUNA] project is very complex. Each stablecoin in it is backed by a cryptocurrency with normal volatility. This is unlike the design of other stablecoins, which peg their exchange rate to the currency in bank accounts. However, Terra is trying to give users not only the TerraUSD peg to the fiat dollar, but also the opportunity to make money on staking.

Terra is one of two protocols the entire project is based on. It acts as a central bank, serving as a basis for issuing stablecoins. The protocol also underlies the infrastructure and payment tools. Terra runs on the Tendermint consensus algorithm, which relies on a system of validators responsible for network security. Validators sign blocks for the blockchain and receive rewards for their work. They also participate in the management of the Terra project’s token storage. The “weight” of each validator in the project and their income depend on how many tokens they have on the stake.

The second protocol – LUNA – is the network’s native cryptocurrency used for staking, network protection, and voting on management. LUNA is added by users to stakes for network protection, as is done in all cryptocurrencies with the Proof-of-Stake algorithm. At the same time, coin holders accept the risks of rate fluctuations. LUNA coins have a floating rate.

LUNA coin holders who don’t want to or cannot become validators are called “delegators”. In return for investing their money in crypto coins, they receive a portion of the staking income and transaction fees.

Delegates receive not only a share of the coins but also partial responsibility. If the validator behaves incorrectly, the network algorithm punishes them, and that applies to the delegator as well. Incorrect behavior includes such transgressions as a double signature on a transaction, leaving a node offline for a long time, missing too many oracle voices.

The project reserves contain TerraSDR tokens. One TerraSDR is always equal to one Terra [LUNA]. Users, who put Luna in stakes and receive profit this way, send their cryptocurrency as collateral.

LUNA coin holders now receive about 5% annually for staking. The total capitalization of the coins is $ 2.63 billion at the current price of $ 6.34 per coin. The price, by the way, is very volatile: throughout 2020 it fluctuated within the range of $ 0.24-0.35, and then at one point in April 2021 it rose to $ 21. The main turnover comes from Binance exchange and pairing with Tether [USDT]. LUNA uses its own Terra Wallet to store coins; third-party solutions are also available.

And that is still not all there is to learn about the structure of the Terra [LUNA] project. We haven’t mentioned yet, that technically LUNA can exist in 3 phases, how TerraUSD was designed as the first truly decentralized, scalable and cross-network stablecoin, and that there is also the Mirror Protocol (MIR), used specifically for creating tokenized assets, etc.

The last crucial part of the description is the criticism of the project. The Terra [LUNA] ecosystem doesn’t just seem extremely confusing – it is. And this scares off both developers and users alike, which does not at all contribute to the project popularization. Users have little interest in the provisioning mechanism, and some may find Terra’s approach riskier than that of other developers.

That’s right: today, crypto platforms have to compete not only for users and holders of their coins but also for developers. The creators of promising DeFi projects can choose between different blockchains, languages ​​for writing smart contracts, etc. And here Terra [LUNA ] is far from having the most advantageous positions.

The final problem of the project is the limited nature of the stablecoin market. It simply doesn’t need a lot of fiat-pegged coins. This is the very case when quantity comes at the expense of quality, which means that the complex Terra [LUNA] ecosystem at some point may simply lose all demand.