What is Terra Luna in Crypto? Definition and How It Works and Uses

Tanya Sharma
Tanya Sharma
Published on January 23, 2023 06:29 AM

What is Terra in Crypto? Know Terra's definition, it's working, and Terra stablecoin. Also, learn what is Luna and Luna 2.0, and the future of Luna 2.0.

What is Terra Luna in Crypto? Definition and How It Works and Uses
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Terra (Luna) Blockchain is one of the most well-known protocols for the deployment of stablecoins, which provide cryptocurrency users with widespread access to DeFi. Terra Blockchain is based on Tendermint and the Cosmos SDK. The Terra Blockchain is primarily used to acquire and use different stablecoins and DeFi. Anchor, Mirror, Astroport, Pylon, Valkyrie, and other projects on the Terra Blockchain that enable this are well-known. The below points sum up Terra Luna in a more concise way:

  • Terra blockchain systems are supported by the open-source network of financial applications and algorithmic stablecoins.

  • One of the two primary cryptocurrency tokens supported by this system is called Terra, while the other is called Luna.

  • While Terra Luna is used for blockchain governance, Terra stablecoins follow the value of fiat currencies like the U.S. dollar and euro.

  • By guaranteeing that the supply and demand for the stablecoin are consistently balanced, the Terra protocol keeps the price of the Terra stablecoin constant.

  • This is accomplished by employing Luna as the Terra stablecoin's variable counterbalance.

What Is Terra?

Terra is an open-source blockchain payment platform for stablecoins. Users may instantaneously spend, save, trade, or exchange Terra stablecoins thanks to the Terra blockchain.

Stablecoins produced by the Terra protocol are intended to closely match the value of fiat currencies (a government-backed currency such as the U.S. dollar or euro). Terra and Luna are the two cryptocurrency tokens that make up this.

The Terra payment system is based on a blockchain and runs on it. Terraform Labs, a South Korean company launched in 2018 by Do Kwon and Daniel Shin, created it.

Do Kwon founder of the firm Anyfi, which provides decentralized wireless mesh networking technologies. Do Kwon previously worked for Apple and Microsoft.

In addition to being the co-founder of the Korean e-commerce company TMON, popularly known as Ticket Monster, Shin is the founder and CEO of the Asian payment technology company Chai, a Terra partner.

A white paper from April 2019 with Do Kwon listed as one of its four co-authors outlines the business case for creating Terra.

The Terra protocol aims to keep the price of the Terra stablecoin constant by making sure that the supply and demand for it are always balanced through the use of arbitrage. 

This is because the primary value of stablecoins is derived from the stability of the price peg, theoretically bypassing the volatility typical of cryptocurrencies.

The Terra stablecoin's variable counterbalance, Luna, absorbs its volatility. Imagine that the entire Terra "economy" consists of a Terra pool and a Luna pool, which are utilized to change the pricing via rewards for network users, in order to comprehend how Terra operates.

These stablecoins, which have the names of fiat currencies, track the price of those currencies. For instance, the base Terra stablecoin, often known as TerraSDR or SDT, tracks the value of Special Drawing Rights issued by the International Monetary Fund.

TerraUSD (UST), which monitors the US dollar, and TerraKRW (KRT), which tracks the South Korean won, are additional stablecoin denominations. Burning Luna allows users to create new Terra.

Terra Pool's expansion 

It is implied that demand for the stablecoin is greater than supply when Terra is trading at a price that is high in relation to its peg. As a result, the supply of Terra should be raised to keep pace with demand.

The protocol encourages users to mint Terra and burn Luna, which lowers the price of Terra (by increasing supply) and raises the price of Luna (by reducing its supply). Users keep performing this arbitrage until Terra trades at the desired peg price.

Terra Pool’s contraction

When Terra is selling at a low price compared to its peg, it suggests that there is more stablecoin supply than demand. In order to match the demand, the network would have to restrict the supply of Terra.

The protocol then encourages users to mint and burn Terra, which raises the price of Terra (by reducing supply) and lowers the price of Luna (by increasing its supply). Users repeat this arbitrage process until Terra trades at its goal price.

Terra Protocol Incentives

The Terra protocol encourages validators (Terra blockchain miners) and delegators (people who want to get rewards without running a full node) With staking rewards that come from two sources: 

Gas fees: are computational charges that are tacked on to transactions to defray processing costs and stop spam. Validators are free to set their own minimum gas fees.

Stability fees: are tacked on to every transaction to maintain market stability. There are two: spread fees, which are percentage costs added to any exchange between Terra and Luna stablecoins, with a minimum spread fee of 0.5%, and Tobin tax, which is a percentage fee added to any swap between Terra and stablecoins.

Terra Arbitrage

Atomic swaps—cryptocurrency exchanges between coins that run on different chains—between Terra and Luna, as well as between various Terra stablecoin denominations, are made possible via the algorithmic market module of the Terra protocol.

The market module, which is designed to function similarly to a market maker, makes sure that there is an easily accessible and liquid market for the assets of the protocol, with stable prices and reasonable exchange rates between them.

Users are encouraged to maintain the price of Terra via the market module, which makes it possible to always exchange $1 worth of Luna for 1 TerraUSD (UST) and vice versa. This works, for instance, if 1 UST is selling at USD 1.005 (above the $1 peg), users can exchange $1 of Luna for 1 UST via the market swap functionality of Terra Station, which is Terra's native platform for wallet, swap, governance, and staking operations.

In contrast, consumers can purchase 1 UST for USD 0.995 (i.e., slightly below the $1 peg) and then use Terra Station's market switch feature to exchange 1 UST for $1 of Luna. The exchange will result in the destruction of 1 UST and the creation of $1 worth of Luna, netting the user USD 0.005 in profit. The UST pool continues to diminish as a result of this arbitrage activity, pushing the price of UST upwards until it reaches the $1 peg.

The report suggests that cryptocurrency Terra is:

  • Growth-oriented and price-stable.

  • Based on the idea that a price-stable cryptocurrency combines Bitcoin's finest qualities with those of fiat money (BTC).

  • To be valuable as a medium of exchange, a new digital currency must achieve maximum adoption.

The project specifies that in both the fiat and blockchain economies, there is a need for a decentralized, price-stable money protocol; this protocol may be the ideal use for cryptocurrencies.

Terra has a developing ecosystem in the cryptocurrency area with 114 projects spanning Web 3.0, non-fungible tokens(NFTs), and decentralized finance (Defi) in its mission to become a top e-commerce stablecoin payment and decentralized finance (Defi) service provider (NFTs).

These projects comprise:

Anchor Protocol: A fixed-yield platform with borrowing yields and frictionless access.

Chai: A South Korean payment app with over 2 million users

LoTerra: A decentralized lottery platform built on the Terra blockchain

Mirror Protocol: Enables the development of fungible assets, or "synthetics," that follow the value of actual assets.

Talis Protocol: An online store and service marketplace for artists

Vega Protocol: A tool for creating and trading derivatives

What is Luna?

Luna is the Terra protocol's staking token, which absorbs the price fluctuation of Terra stablecoins and is used for governance and mining. Users stake Luna to Terra blockchain miners, also known as "validators," who keep track of and validate transactions on the blockchain and are compensated with transaction fees. Luna's value rises along with Terra's utilization.

Luna served four distinct functions inside the Terra network:

  • It was used as a way to pay the Terra network's transaction costs.

  • A system for preserving the stablecoin peg of Terra.

  • Delegated proof of stake (DPoS) staking is used by Terra to verify network transactions.

  • Participation in platform governance through voting and adding to suggestions for Terra network enhancements.

History of LUNA

Do Kwon and Daniel Shin established Terra in 2018 and debuted its main net in 2019. Kwon and Shin created Terra to provide consumers with the stability of fiat currencies while using the power of blockchain technology for faster and cheaper settlements than traditional payment options. Additionally, the two creators thought that such possibilities would enhance blockchain acceptance.

Terra has the support of the Terra Alliance. The Terra Alliance is a global coalition of e-commerce companies and platforms lobbying for Terra adoption. The Terra Alliance enterprises have a combined value of tens of billions of dollars and over 45 million clients.

What is LUNA Classic?

The former chain's native coin, Luna Classic (LUNC), has been renamed Terra Classic. It was launched on May 28, 2022, after the genesis block on the new chain was created following the fork.

Originally known as LUNA, LUNC preserves all of the original Terra Luna coin's features and continues to serve as a regulating mechanism for the Terra Classic stablecoin, TerraUSD (UST).

What is LUNA 2.0?

Terra 2.0 (LUNA) is the most recent cryptocurrency version on the Terra network. The Terra blockchain had a hard fork in May 2022, instigated by founder Do Kwon and voted on by the community. This resulted in Terra 2.0, with a new cryptocurrency known as LUNA or LUNA2, while the previous blockchain and coin became known as LUNA Classic, or LUNC. Both blockchains continue to exist and operate independently, which might be confusing for novice investors.

How does LUNA 2.0 work?

A conventional proof-of-stake (PoS) consensus mechanism is employed to verify transactions on the Terra 2.0 cryptocurrency network. At any given time, 130 validators participate in the network consensus, with voting privileges according to the number of LUNA 2.0 linked to each node. Rewards are generated using gas surcharges and a predetermined 7% LUNA 2.0 inflation rate per year.

Holders of LUNA 2.0 tokens can take part in consensus by transferring their tokens to a validator of their choice. Like delegates, validators frequently stake their own claim. As a result, in this scheme, the validation node keeps a commission before giving out prizes to delegators.

Depending on the validators' voting power, different incentives are generated by Terra 2.0 coin delegators. As a result, payments for delegators must be distributed among a larger group of delegators even though individuals with higher voting power naturally earn more benefits.

The Terra Station interface can be used for delegation, although there is a risk involved. As an illustration, bad behavior by validators may result in the slicing of staked LUNA 2.0. Even if the validators are momentarily erroneously turned off, slashing is still possible.

Terra (LUNA) Crash

The issue was that terra (UST), an algorithmic stablecoin, was not linked to a stable asset like gold or even the US dollar, both of which have remained reasonably stable over lengthy periods of time. Instead, it was linked to LUNA, a coin as volatile as any other cryptocurrency.

When LUNA plummeted, it went from a peak of over $116 to less than a cent and was eventually delisted from cryptocurrency exchanges. UST went along with it. As a result, the whole crypto market suffered losses.

Terra (LUNA) Fork

To save the blockchain, creator Do Kwon proposed a network hard fork that would permanently decouple LUNA from UST. LUNA 2.0 was born on May 28, three days after the Terra community voted in favor of the hard fork. The previous coin was renamed Luna Classic (LUNC). Terra LUNA coins were airdropped to LUNC holders.

LUNA Classic is still tied to Terra UST. However, when the price of UST fluctuates, the supply of LUNC is adjusted to stabilize the UST price. As a result, if UST climbs too soon or too much, the supply will be burnt in order to mint LUNC. The opposite is also true.

What distinguishes LUNA 2.0 from LUNA Classic?

LUNA Classic and LUNA 2.0 are not the same, despite how similar they appear to be. The new governance scheme has split the Terra network into two chains. The previous chain will be Terra Classic with Luna Classic tokens (LUNC), while the new chain, dubbed LUNA 2.0, will be Terra with LUNA tokens.

LUNA 2.0 will coexist with the previous version rather than being completely replaced. The developer community will start creating DApps and creating utility for the new coin, and any decentralized applications (DApps) established for Terra Luna will be preferred for LUNA 2.0. It does not, however, have an algorithmic stablecoin.

This does not prevent Terra Classic from losing its investor and trader base, either, as many of them are opposed to Do Kwon's restoration plan and the new chain. In reality, Terra Classic still has a substantial community, and they have decided to start burning as many LUNC tokens as they can in order to decrease the coin supply and increase the cost of individual tokens.

Terra LUNA Price Predictions

Terra LUNA is subjected to great volatility and price fluctuations after the Terra crash.  Any analytics company predicting the price of any crypto or digital assets is based on some tools and algorithms. The below price predictions are made by the analytic firm Changelly. It’s just a prediction and not any investment idea.

Terra LUNA Price Prediction 2023

Based on recent years' Terra pricing, it is estimated that the minimum price of Terra in 2023 will be roughly $2.27. The most likely LUNA pricing is approximately $2.85. In 2023, the average trade price might be $2.36.

Potential ROI: 77%

Terra LUNA Price Prediction 2024

According to cryptocurrency specialists' technical study of Terra pricing, LUNA is anticipated to have the following lowest and maximum prices in 2024: around $3.34 and $3.93, respectively. The projected trading cost is $3.46 on average.

Potential ROI: 144%

Terra LUNA Price Prediction 2025

The values of Terra and its swings over the last years have been studied by cryptocurrency professionals. It is expected that by 2025, the minimum LUNA price will be $4.70, with a maximum of $5.85. The average cost of trading will be roughly $4.83.

Potential ROI: 263%

Terra LUNA Price Prediction 2026

According to crypto specialists' research of Terra expenses, the following maximum and lowest LUNA prices are projected in 2026: $8.16 and $7.04. It will be traded at $7.23 on average.

Potential ROI: 407%

Terra LUNA Price Prediction 2027

Crypto professionals are continually examining Terra's volatility. According to their forecast, the average LUNA price will be about $10.71. It might fall to as low as $10.42, but it could still rise to $12.14 by 2027.

Potential ROI: 654%

Terra LUNA Price Prediction 2028

Every year, cryptocurrency analysts anticipate the price of Terra. In 2028, LUNA is expected to trade between $14.73 and $17.93. During the year, the average cost is estimated to be roughly $15.27.

Potential ROI: 1014%

Terra LUNA Price Prediction 2029

Cryptocurrency gurus have delivered their Terra price predictions. The maximum LUNA price of $25.37 will define the year 2029. However, it is possible that the rate may fall to approximately $20.93. As a result, the average trading price is predicted to be $21.54.

Potential ROI: 1476%

Terra LUNA Price Prediction 2030

After years of studying Terra pricing, crypto specialists have calculated the LUNA cost until 2030. It will be traded for at least $31.47, with a possible high of $36.75. As a result, the LUNA price in 2030 is expected to be roughly $32.54. 

Potential ROI: 2183%

The future of LUNA 2.0

Given the demise of the UST stablecoin, it is impossible to accurately forecast LUNA 2.0's future. Even though there aren't many Defi projects to mention right now, LUNA has previously been the home to a number of highly well-known Defi projects. It's also important to note that Terra has surpassed Binance Smart Chain (now BNB Chain) to become the second-most popular Defi platform.

Based on history, the future is unpredictable. The performance of the new chain and its efforts to win back investors' faith will determine how successful Terra LUNA 2.0 is. Of again, given that Ethereum has more mindshare than almost any project out there, it's always feasible that its ultimate transition to PoS would enable it to surpass rivals like Terra.

Terra (Luna) FAQs

How Does Terra Work in Crypto?

One of the two tokens used as a payment method in the Terra blockchain is Terra. Through algorithms, it is linked to different fiat currencies.

Are stablecoins like UST?

Terra US (UST) is a stablecoin since it is intended to sustain value and is algorithmically tied to the U.S. dollar. On May 9, 2022, it lost its peg, though.

What Are UST and Luna?

The Terra blockchain's native coin, Luna, is utilized for staking and regulating Terra's pricing. The Terra token that is linked to the USD is called TerraUS (UST).

What number of Terra LUNA are there?

There are 6 trillion Terra Luna in circulation right now.

Are Terra Luna coins reliable?

Terra (LUNA) has enormous ambition as a means of trade and payment, many cryptocurrency specialists regard it to be a very desirable coin.

How Does Luna Function?

The native token for governance, mining rewards, absorbing volatility, and transaction costs are called LUNA. In order to mine Terra stablecoins, miners stake LUNA, according to the protocol's Delegated Proof of Stake (DPoS) process. The most important and potent fiat currencies in the world are tied to Terra stablecoins.



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