What is Terra? (UST) and (LUNA)

What do you think of when you hear the word ecosystem? Most people think of nature as a jungle that contains plants, fungi, snakes, small mammals, birds, bacteria, and everything that requires a whole system to function independently. 

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.

If you heard the word financial ecosystem, what would you think?

The idea is the same. The financial ecosystem is a collection of different people organizations, processes, and systems that let us all buy and sell things, use money, 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 it needs an ecosystem.

Welcome, to Shavuna the number one website for crypto education. Here we explain topics of the cryptocurrency world using analogies stories and examples so that you can easily understand them.

In this blog post, I will explain what the terra ecosystem is, how it’s currently a working algorithmic stablecoin, what on earth that means and what opportunities lie waiting for you to take advantage of. 

What is Terra Blockchain?

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 stablecoin.

Let me explain the payment processing side really quick, and then we’ll get on to the cool part, the algorithmic stablecoin.

First, off Vis, MasterCard, or American Express aren’t working for nothing. They take around two to three percent of every transaction that they help in fees that the merchants pay to the credit card company.

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 start to add up.

Speaking of fees, we are currently charging a zero percent fee for sharing this blog post, just a little reminder to share our articles with more people and spread the knowledge we have to share about cryptocurrency ideas.

Back to 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 lower than one percent, and you can see the benefits of merchants switching to the Terra blockchain.

You might say other blockchains and other cryptosystems have done this before. But here’s what they haven’t done. Besides payment processing, Terra has other cool features that set it apart from other cryptocurrencies and other financial processes and products.

Think about this question Terra uses a blockchain, and bitcoin uses a blockchain too. Well, what’s the difference? Why would a merchant want to use Terra when they could use bitcoin?

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 stablecoins. We actually have an entire article on stablecoins and how they work if you’re interested in learning more.

But the idea here is pretty simple, stablecoins are simply cryptocurrencies that are pegged to fiat currencies.

So if people have measured their wealth in these 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.

The core idea here is 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 to expect it to be worth the same thing tomorrow and the next day and hopefully the following year.

Terra solves this by using a stablecoin algorithm that allows specific tokens on the network to stay at a single price.

Terra has a stablecoin for several different currencies like the US dollar, which is represented UST, the Korean won represented as KRT, and the euro represented as EUT.

These are simple ways of using cryptocurrency to transact more straightforwardly, faster, and cheaper than before.

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. 

I know exactly what you’re thinking, algorithmic stable coins never worked.

Well, so far, Terra has worked.

What About Titan Crash?

I’m going to bring up the recent titan and iron finance algorithmic stablecoin crash because it seems similar. 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.

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 dapps and platforms to use, while titan was simply a get-rich-quick yield farming opportunity that was pumped and dumped on. 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 dapps, the smart contracts, and protocols.

This is exactly what also Terra stablecoins are banking on as well.

Now I may be wrong, and Terra may crash in the future, but as far as the research we have performed, this process has worked pretty far, and it appears quite different from the titan and iron finance death spiral.

What is LUNA?

Let’s talk about how they’re similar. The Terra ecosystem holds two assets at its heart; the native network coin called LUNA and the stablecoin, which is called UST.

The power of LUNA is a bit different than in other projects because it is 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 precisely 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, they use LUNA to incentivize people to do certain things to stabilize the price.

They do this by either 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.

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.

You might wonder who they give all these extra Terra tokens to?

They give them to the people who trade in their LUNA tokens, but they do it for a tiny but significant 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 minimal but meaningful profit.

This means we can basically shrink the circulating supply of Terra, causing the price to go up.

This begs the question, 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.

This brings us to another question: why on earth would you hold LUNA?

Well, you can hold LUNA for two reasons:

  1. If you’re bullish on the Terra ecosystem and you think that more people will come into it.
  2. 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.

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 participating in the Ponzi scheme.

Terra gets its value because people can use this stablecoin for stuff all the way across the ecosystem.

Speaking of that, what can you do with Terra?

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 think in dollar amounts. 

Terra Protocols 

Terra has two big protocols called anchor and mirror.

Mirror Protocol

First of all, the mirror protocol allows for the creation of what they call mAssets. Basically, representations of other assets are very similar to exchange-traded funds or ETFs on the stock exchange.

That was a bunch of fancy words, and here at Shavuna, we like to make it simple. That 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 think this is a great idea, and it’s actually been used and working for about two years now, but it uses synthetic assets, and some experts have an issue with that.

Overall though, the mirror protocol brings people to buy LUNS and UST.

Anchor Protocol

Anchor protocol uses the staking mechanism of Terra to create what are basically savings accounts, and right now, I think they’re paying about 20 percent APY.

Basically, you deposit and save your stable coins, and you earn a specific percentage rate on your coins, just like traditional savings accounts are supposed to work.

This incentivizes people to keep their Terra on the ecosystem.

The way that I see it is that mirror gets people to use LUNA, and USTwhile anchor keeps people using LUNA and UST.

We like to follow this model too. We create blog posts so that you can find us, and then if you subscribe to our email list, we make sure to keep giving you high-quality articles so you’ll stick around just like Mirror and Anchor.

One last thing I want to mention is that Terra was created using the Cosmos blockchain. The name isn’t 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.

Nearing the end of this post, 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 potentials to grow.

Terra was created by Daniel Shin and Do Kwan, graduates of the University of Pennsylvania and Stanford, respectively, who were each successful in their own right before creating Terra.

Terra is 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, which is called chai.

Chai has been proliferating among the consumers in the Asian markets, eclipsing bitcoin cash and even rivaling Litecoin as of 2019.

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 want to do is invest further in different use cases of Terra like the dapps, which would significantly increase user growth.

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.

Whatever direction Terra takes, it will be a coin in a system that I keep my eye on.

Ending this article, I hope you guys enjoyed this blog post. I hope you learned something and most of all, I hope to see you in the next one.