Editor’s Note:

The following article was written before the complete meltdown of the Terra ecosystem in May, 2022. CoinDesk is maintaining the content for historical purposes but please note that both LUNA (now known as LUNA Classic or LUNC) and UST, the former stablecoin linked to LUNA, have collapsed and do not function as described below.

-Toby Bochan, Managing Editor, Learn

Luna is one of the most popular coins for staking and lets users earn passive income by locking up their LUNA tokens.

In March 2022, the success of its platform allowed LUNA to overtake ether – the native cryptocurrency of the Ethereum blockchain – as the second-most staked asset with $30 billion worth of tokens locked away by holders.

According to data, users can expect around 6-7% annualized interest on their deposits depending on how they participate in the staking process – far greater than any interest rate offered by traditional banks.

Luna uses a delegated proof-of-stake consensus method to run smart contracts and validate transactions on its blockchain.

That means that holders who want to stake LUNA have two options:

A “validator” is the term used to describe anyone who helps verify and propose new blocks of transaction data. With Luna, a person or group of people are required to run computing equipment of a certain spec virtually nonstop.

In fact, it’s so competitive that only the top 130 validators are granted the right to verify and add new blocks to the Terra blockchain. That rule is specific to the LUNA staking ecosystem and not something commonly seen with other staking assets.

In return for their efforts, validators collect a commission fee from stakers in the network. The top five validators charge a 5-10% commission fee for their work – something that needs to be factored in when calculating delegated staking returns.

Validators can raise funds to stake from other luna holders by delegation. The bigger the fund, which is sometimes referred to as staking pool, the more chance the validator and his group of delegators will propose a block and pocket the reward from the transaction fee.

Staking by delegation is much more accessible for a majority of token holders who are looking to earn interest on their assets. Any LUNA holder can delegate his coins to a validator without needing to comply with the tough validator requirements, and still be able to earn rewards.

A notable risk for anyone who stakes LUNA (regardless of being a validator or delegator) is slashing. If the validator commits a mistake during the consensus process – i.e. misses a vote, suffers a network outage or is offline for long periods of time – he will be penalized. That can amount to losing a small portion of staked funds, including the delegators’ stake, or getting completely excluded from consensus voting, which means that no rewards can be earned.

If you want to delegate your LUNA to another person or group of people, an easy option is to use the Terra Station Wallet – the official wallet software for holding Terra assets.

As already mentioned, delegators can earn an annual yield of more than 6% by staking their LUNA. Be aware, however, that yields may change in the future. If you decide to stop staking and withdraw your tokens, there is a 21-day waiting period until you will receive them. A full guide on how to start staking LUNA can be found here.

To choose a validator delegate to stake LUNA, you should consider the following points:

Read more: 6 Top Cryptocurrencies You Can Stake: An In-Depth Guide

The barrier to becoming a Terra network validator is pretty high compared with the vast majority of other staking-based cryptocurrencies. Only the validators with the 130 biggest LUNA stakes are allowed to participate in the validation process.

Here you can find a full list of the 130 active validators.

As of this writing in March 2022, the threshold to become a validator is close to 152,000 luna staked, worth about $13 million.

A validator’s total stake is the sum of the “self-bonded” tokens – the tokens owned and staked by the validator – and the tokens delegated to the stake pool. If a validator’s stake falls below the threshold, meaning he is outside of the 130th largest stake, he loses its status as a validator, meaning that he cannot participate actively in securing the network and won’t earn rewards. Any tokens in their fund then become “unbonded” – meaning they are free to be staked elsewhere.

In practice, any participant in the Terra network can apply to be a validator. A candidate can submit an application by creating a validator profile following the steps detailed on the official Terra website.

The candidate registers by sending a "create-validator" transaction to the blockchain with a series of data including:

Once that's done, the validator can lock up his own coins and start to accept delegations to stake.

After registration, the validator will be “unbonded,” meaning that he doesn't actively participate in the consensus and earn rewards. To gain the “bonded” validator state, he has to have one of the 130 largest stake pools.

Read more: Ethereum Nodes and Clients: A Complete Guide

As LUNA has attracted investors' attention, more and more exchanges started to list the token in their offerings. As of this writing, users can buy LUNA on most of the major exchanges, including:

A notable omission is Coinbase, which didn't support LUNA as of March 2022.