What is Terra.money? A guide to Understanding the Multipurpose Network

What is Terra.money? A guide to Understanding the Multipurpose Network

Terra.money is a blockchain technology project that is focused on building a stable currency or stablecoin for global use and with an emphasis on becoming a means of payment for electronic commerce. To achieve this, Terra.money has created UST, a dollar-pegged stablecoin, and LUNA token, a native platform token. The idea is that both tokens complement the functions of the blockchain and allow a secure and stable operation of its tokenomics.

To do this, LUNA helps UST maintain a 1:1 anchor, using an algorithmic system that reacts to market needs. For this, the price of LUNA and the issuance of UST within the system are taken into account. With this, it is possible to maintain the stability of the price of UST and everyone can enjoy it with peace of mind.

Terra.money was founded by TerraLabs, a specialist blockchain technology company based in South Korea, which is strongly related to products such as Mirror Protocol, Chai payment system, and Anchor Protocol, which gives us an idea of the specialization and confidence of the company in this technology.

What is Terra USD (UST)?

Terra USD or UST is a stablecoin that lives on the TERRA blockchain. This stablecoin works algorithmically in much the same way as DAI from MakerDAO. However, Terra USD does not need to collateralize cryptocurrencies to create new UST, and instead just burns the dollar equivalent amount of the LUNA token for the system to generate its UST equivalent for use. All this process is done automatically thanks to the smart contracts that control this system.

UST generation example

To see this in a simpler way, let's continue with this example: Suppose the system needs to create 1000 UST to keep the token price stable. In that case, the system looks up the price of the LUNA token and finds that it is $20 per token. At that point, the system prepares a burn of LUNA tokens out of a total of 500 LUNA, in order for the burn to enable the system to generate 1000 UST. Only when the LUNA token burn is done, the 1000 UST is obtained, and the balance of the system is maintained.

The same happens in case it is necessary to create LUNA tokens and burn UST, burning the equivalent of the latter, to generate new LUNA and maintain stability.

What is LUNA Coin?

The LUNA token is the native token of TERRA. This token is used to ensure the operation of the network, pay commissions, the decentralized governance system and collateralization of UST. In a nutshell, LUNA is the epicenter of how TERRA works.

TERRA is a blockchain that works thanks to the Proof of Stake (PoS) algorithm, so the validating nodes of the network must stake LUNA in order to participate in the voting and block generation system. This system is the one that provides network security, avoiding DDoS attacks and double spending on the network. Like any PoS system, staking offers rewards that are used by validators to cover their expenses and to inject new liquidity into the TERRA ecosystem.

Let's remember that the rewards in PoS come from the commissions that are charged in the network and the reward for the block. So we have that these rewards are divided between the validators of the network and the delegating stakers. This creates a system where stakers are incentivized to keep staking to improve the security of the network and their profits. Additionally, the system serves to reduce LUNA's liquidity levels while maintaining the good health of the UST anchor.

Created on 4th May 2022