Terra is a decentralized payment network for algorithmic stablecoins, or cryptocurrencies that track the value of other assets or currencies.
The Terra blockchain allows users to instantly use, store, exchange, or convert Terra stablecoins. The Terra protocol generates a stablecoin that tracks the price of a government-backed or fiat currency, such as the US dollar or euro, in real time.
Terra is one of two primary cryptocurrency tokens this protocol supports, with Luna being the other. Terra tracks the value of fiat currency like US dollars and Euros, whereas Luna is for management and mining. To do this, Luna employs a variable balancer for the Terra stablecoin.
Terra is a stablecoin that tracks the value of fiat currencies and got its name after them. For example, the underlying stablecoin Terra tracks the price of special drawing rights in the IMF and refers to as TerraSDR or SDT. Users burn the Luna to create a new Terra.
Luna is for Management and Mining
Luna is a Terra protocol betting token that absorbs the price volatility of the Terra stablecoin. Users bet on Luna for Terra blockchain miners, called validators. These record and verify transactions on the blockchain and receive transaction fees as a reward. As Terra’s utilization increases, the value of the Luna increases as well.
The stability of its price fix determines the underlying value of stablecoin. It avoids the volatility typical of cryptocurrencies, so the Terra protocol maintains the price of the Terra stablecoin by balancing supply and demand. Luna is a variable counterweight to the Terra stablecoin and absorbs volatility. To understand how Terra functions, imagine the entire Terra economy consisting of a Terra pool and a Luna pool.
The Luna supply pool adds or subtracts Terra’s supply to maintain Terra’s pricing. Users burn the Luna to generate Terra, which they then burn to create the Luna. This is achievable with an Algorithmic Markets Protocol module that incentivizes Terra to be mined or burned through an arbitrage function.
Terra Pool Expansion When Terra trades at a higher price compared to pegs. It means that the demand for the stablecoin exceeds the supply. This means we need to increase Terra’s supply to meet demand. The protocol encourages users to issue Terra and burn Luna. It increases supply by reducing supply and raising the price of Luna to lower the price of Terra. Users continue this arbitrage trading process until Terra trades at the target fixed price.
Terra Pool Reduction
The opposite happens when Terra is trading at a lower price than the peg. This means that there is more supply than demand for stablecoins. This should reduce Terra’s supply until it matches demand. This arbitration process continues until the user trades Terra at the target price.
Terraform Labs developed Terra, a Korean company founded in 2018 by Kwon Do and Shin Daniel. Currently, CEO Kwon previously worked for Microsoft. Shin is the founder and CEO of Chai, an Asian payment technology company, a partner of Terra and the founder of Korean e-commerce company TMON. The business case for Terra Development has its summary in the April 2019 white paper, which lists Do Kwon as one of its four co-authors.
This document proposes a low-cost and growth-driven cryptocurrency called Terra. This is based on the notion that a low-cost cryptocurrency should combine the advantages of fiat and Bitcoin (BTC) and that a successful new digital currency should maximize adoption.
It is useful as a currency or medium of exchange. The document states that there is a demand for decentralized, low-cost fiat protocols in both fiat and blockchain economies. Such protocols may be the best use cases for cryptocurrencies.