What is Terra Money?

Apr 1, 2020 4 min read
What is Terra Money?

An introduction and guide to the Terra Network.

Hi Readers👩‍💻,

Launched in January 2018, this ambitious project has been expanding and working towards a price-stable currency and building a global payment network. Today, we’d like to give you an introduction to the Terra network.

🧐 Introduction to Terra

The Terra Protocol is the creator of the Luna Token, Terra Core, and the blockchain payment solution CHAI. The Terra Protocol’s mission is to free people from the hidden fees embedded into everyday payments. They want to strip away all inefficiencies by using blockchain. The design of the Terra Protocol is based on two things: stability and adoption by e-commerce platforms.

The Terra Protocol runs on a Tendermint Delegated Proof of Stake algorithm and Cosmos SDK. It is aimed at becoming a new worldwide financial infrastructure on which different DApps can be created. Terra has designed a stablecoin that can be used as a payment method on its blockchain payment solution. If you want to become a validator, you must demonstrate investment in the Terra protocol by staking their Luna tokens. The Luna token is the main digital asset in the Terra Protocol and therefore represents mining power.

The blockchain payment solution CHAI was launched in June 2019 as a mobile payments app. CHAI offers the possibility for the same seamless payment experience as mainstream apps like PayPal. However, the transaction fees and instant connect to sellers through the blockchain technology, is what makes this DApp stand out. In February 2020, the DApp had 1.2 million users.

⚖ Terra stability

The Terra Network has created a stable-coin mechanism. Their goal is to create a stable-coin that has purchasing power to be able to participate in the e-commerce world.

Some of the world’s major fiat currencies such as USD, KRW, MNT, and the IMF SDR are already available as stablecoins on the network. With time, more and more currencies, such as EUR, CNY, JPY, and GBP will be added. TerraSDR is the currency in which transaction fees, miner rewards, and stimulus grants will be denominated. A system supporting atomic swaps is brought in place to make it possible for Terra currencies to be exchanged at their market rates.

Measuring the stability of the coin is done with miner oracles. The reasoning behind this is that the price of Terra currencies in secondary markets is originated outside the blockchain. Therefore, the system has to rely on a decentralized price oracle to estimate the true exchange rate. The oracle mechanism works as follows:

  1. Miners submit a vote for what they believe to be the current exchange rate between the Terra sub-currencies and fiat assets.
  2. The weighted median of the votes will be set as the true rate.
  3. An x amount of Terra is rewarded to those who voted within 1 standard deviation of the selected median.

The price-stability is achieved by consistent mining rewards. The basic principle behind this is: when the price of Terra rises above the target, the protocol needs to expand its supply. And when the price falls below the target, the supply needs to be contracted. Contracting and expanding Terra’s supply simply means buying or selling Terra at its target price. Luna is used to making these exchanges possible; therefore it is absorbing volatility in the demand for Terra. The supply of Luna fluctuates in accordance with the changes in Terra demand.

Miners are the security of the network and the stability of Terra. By shielding miners from the volatility, rewarding them according to the fluctuations in demand. Miners are rewarded through transaction fees; every transaction pays a small fee to miners. Secondly, seigniorage is used as a reward; whenever the protocol mints Terra and earns Luna in return it generates seigniorage (profit from minting).

🌏 The Terra Alliance

The Terra Alliance is not yet launched, however, it is a global e-commerce alliance. The alliance has grown to a large number of companies in multiple countries and currently spans around 25 billion USD for 45 million monthly active users across Asia.

This alliance is a new payment network created for e-commerce. The challenge was to craft an incentive structure that jumpstarts the adoption process for both customers as platforms. Terra’s solution for this is their blockchain protocol that adjusts the money supply as mentioned above. The seigniorage created by miners can be used to get high discounts on different partnered e-commerce websites, making the adoption a lot easier.

🌙 The Luna Token

As mentioned above the Terra Protocols’ first native token is called Terra. However, they created a second token called Luna — which is the token that is used for staking and to obtain authority within the network. Therefore, we’re diving deeper into the Luna subject.

  • The initial LUNA token supply is 994,871,354 of which, at the time of writing, the amount staked is 249,980,162 (25%).
  • Staking rewards for Luna are based on transaction volume inside the Terra economy. Currently, the annual yield is set at 11.17%.

The Luna staking protocol is based on Cosmos and has a lock-up period of 21 days. Running a validator node on the Terra Network is a complicated and high-responsibility operation. Therefore, most often it is easier to delegate your digital assets. You can check the Terra Delegation Guide here for more information.

More information & sources

DISCLAIMER: This is not financial advice. Staking and cryptocurrencies investment involves a high degree of risk and there is always the possibility of loss, including the loss of all staked digital assets. Additionally, delegators are at risk of slashing in case of security or liveness faults on some PoS protocols. We advise you to DYOR before choosing a validator.

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