LUNA is the native cryptocurrency of Terra
(LUNA), an open-source
, public blockchain protocol that enables users to create their own stablecoins pegged to several different international fiat currencies including the U.S. dollar (UST), Korean wan (KRT) and the euro (EUT). These stablecoins are not backed by fiat currencies, but rather they maintain their price using algorithms and Terra’s LUNA token.
The Terra blockchain is a proof-of-stake
(PoS) network for stablecoins whose value is stabilized using an algorithm instead of being backed by physical currency. Stablecoins
are a type of cryptocurrency that serve as digital representations of government-issued currencies that continuously track their price. Terra’s native LUNA currency maintains the value of those stablecoins by fluctuating in price based on market effects and supply and demand.
In order to mint new terra stablecoins, users must burn the protocol’s LUNA token, making it more valuable as the protocol is adopted. That means the value of luna is ultimately determined by the use and supply of terra on the network.
In November 2021, luna reached its all-time high of $54.77 after a proposal
was passed to burn (permanently remove) 88.7 million LUNA
($4.5 billion) and mint at least 4 million more terra. While some users believed that burning nearly 89 million luna was excessive, Terra co-founder Do Kwon stated that burning 10% of the protocol’s community pool ultimately made the stablecoin’s algorithm less susceptible to systematic risk. Luna hit its all-time low in March 2020 at $0.1199, prior to a larger adoption of the terra stablecoin.
How does LUNA work?
The Terra protocol operates using a two token system made up of terra and luna. First, terra is the protocol’s stablecoin that tracks the price of different fiat concurrencies. The terra stablecoin can be further broken down into different, physical currencies like terraUSD (UST). In order to mint new terra stablecoins, users are required to burn the protocol’s second token, luna.
Luna is the native token for maintaining price stability for terra stablecoins. The white paper
for the protocol stipulates that both the terra and luna tokens use a model of expansion and contraction.
Let’s say the price of one terraUSD exceeds the price of a single U.S. dollar and becomes worth $1.10. The Terra protocol gives users incentives to burn luna and mint new terraUSD tokens. For each dollar of luna burned, a new terraUSD is created worth one dollar. Users can then sell their newly minted terraUSD tokens worth one dollar for the current market price of $1.10 and secure a profit. By increasing the supply of terraUSD tokens, the value will eventually return back to its $1 price peg.
Conversely, when the price of terraUSD falls below the price of the underlying asset, the protocol contracts: incentivizing users to burn terraUSD and mint new luna tokens. In doing so, the supply of terra decreases, driving its price back up until the stablecoin regains its peg.
Key events and management
The Terra protocol was developed by co-founders Daniel Shin and Do Kwon in January 2018 and is maintained by Terraforms Labs. When the project was founded, Kwon served as the CEO of Terraform Labs and Shin was working as the co-founder of Ticket Monster, an e-commerce company.
In August 2019, Terra added
Singsang Market to its alliance of internet marketplaces, expanding its role in facilitating borderless e-commerce in South Korea. The alliance of internet marketplaces are a group of South Korean vendors that use Terraform Labs’ Chai wallet
for mobile-based stablecoin payments on the Terra network. Following the addition of Singsang Market, Terra continued to expand its presence as a blockchain for international stablecoin payments in South Korea.
At the end of September 2021, Terra began its Columbus-5 upgrade, which integrated
the Terra Blockchain and Cosmos (ATOM) to enable cross-blockchain interoperability via the inter-blockchain communication standard. The Cosmos community had agreed
to connect the two blockchains in March 2021.
In January 2021, Terraform Labs raised
$25 million from Galaxy Digital, Coinbase Ventures, Pantera Capital and others. The funding didn’t go directly to the Terra protocol, but rather to products offered by Terraform Labs. Terraform Labs has launched decentralized finance
protocol Anchor, as well as other blockchain protocols, including the Mirror protocol, Pylon protocol and other projects that use the Terra blockchain.
During Messari’s Mainnet conference in New York in September 2021, Kwon was served
a subpoena by the U.S. Securities and Exchange Commission, which was investigating whether Terra sold unregistered securities in violation of U.S. law. As of October 2021, Kwon, a citizen of South Korea, sued the SEC. As a citizen of South Korea, Kwon was contesting the subpoena.