Terra (LUNA) is a blockchain project that aims to create an entire ecosystem focused on the generation of DeFi applications on a high-speed blockchain and functionalities to develop stablecoins anchored to the main fiat currencies around the world.
Get started on Bit2Me and jump into the world of cryptocurrencies with a head start. Sign up easily and get €5 FREE on your first purchase with this link. Don't wait any longer to join the crypto revolution! Register
Ehe world of stablecoins has been one of the fastest growing in the world of cryptocurrencies and Terra (LUNA) was a clear example of this. Terra is a project that was born with a clear objective: create a blockchain framework for application deployment DeFi what do they use stablecoins native and the LUNA token.
The idea was to use the LUNA cryptocurrency to algorithmically collateralize stablecoins, thereby enabling LUNA as a governance and payment token on the Terra network, and stablecoins for DeFi platforms and electronic payments. In this way, Terra created a framework that others can use to run their own applications, stable and secure payment systems from anywhere in the world. But the experience did not turn out as expected, and the Terra ecosystem collapsed in May 2022, forcing it to reinvent itself.
Interactive graph with the milestones that mark the history of Terra ????
Origin of Terra Money
Terra Money is the brainchild of TerraLabs, a South Korean company founded by Daniel Shin y do kwon. TerraLabs began its operations in January 2018 and since then it had planned to revolutionize the crypto space with a new idea: the Terra blockchain.
The idea of this blockchain was to create a high-speed infrastructure that would allow DeFi applications to be deployed through all the tools integrated into the blockchain itself. This is how the development of the Terra blockchain began, its LUNA token, algorithmic stablecoins and all the tokenomics that would make the operation of this new project possible.
As development became more and more complete, TerraLabs integrated its efforts with other projects such as MirrorProtocol, the electronic payment system Chai y Anchor protocol. With these new added efforts, the project started developing faster and in April 2019, Terra announced the official mainnet release along with its whitepaper.
How does Terra work?
First of all, you should know that Terra is a protocol and its own blockchain that does not depend on other blockchains such as Ethereum o Solana. This means that the chain of blocks, wallets and all the infrastructure of Terra works autonomously from other projects.
That said, the Terra blockchain works thanks to the protocol of Proof of Stake or Proof of Stake (PoS), so the block validators should do staking of LUNA tokens, to be able to vote and validate blocks within the network. This is the main functionality of the LUNA token, ensuring the proper functioning and security of the Terra network.
Additionally, Terra has been built to give developers advanced tools for smart contracts, allowing them to design dApps. As Terra is a PoS type blockchain, these dApps benefit from a high transaction speed and low commission costs, which provides an additional plus to the use of Terra as a platform to create dApps. However, the jewels of Terra's operation are its ability to execute smart contracts, deploy stablecoins and DeFi services that are integrated within Terra.
On the other hand, all of Terra's operations are carried out in a decentralized way and are controlled by the smart contracts of the system enabled by the technology. cosmwasm. This allows developers to build smart contracts in Rust, Go, or AssemblyScript, use Terra stablecoins, onchain swaps, layer one oracles natively, and expose dApp user bases to Terra payment services without using permissions.
2021 In September, Terra updated its protocol to version Columbus-5, which introduced important changes in the system. One of them was the modification of the project's tokenomic model towards the burning of all the LUNA used to mint TerraUSD (UST), instead of assigning a part to the community pool as was the case previously.
Furthermore, with the integration of LUNA in the standard Inter Blockchain Communication (IBC) allowed the Terra network to communicate and interact with operational protocols in Cosmos. This meant a more widespread adoption of LUNA throughout the Cosmos ecosystem, which allows cross-operation between almost twenty different blockchains. To better understand the workings and structure of LUNA, let's take a closer look at each of its parts.
LUNA, a token for the Terra network
LUNA is the native token of the Terra network. As we mentioned before, the main function of this token is to protect the network from the misuse of its resources (spam) by using it as a currency to pay commissions for operations within the system.
The second use of this token is its application for the staking necessary to enable validator nodes within the Terra network. This is possible because Terra works under the Proof of Stake (PoS) protocol, so each validator must stake a certain number of tokens to obtain voting power and participate in the generation and validation of blocks. Through this process, Terra produces and validates transactions at high speed and low cost of use. It also makes it possible to incentivize the work of validators (which increases network security), generate new LUNA tokens and increase the user base within Terra.
Thirdly, LUNA serves to exercise governance over the Terra protocol, this through a DAO and a community that you can access from Agora.
The LUNA token was used to algorithmically collateralize stablecoins within the system. In this case, Terra had a collateralization mechanism for any fiat currency. That system was used for two currencies: TerraUSD (UST) and TerraKWR (KWRT).
Phases of the LUNA token
For the LUNA token stakers, both for having a validator node and for participating in the DeFi protocol of this coin, they had to take into account the different "Phases" of the cryptocurrency, namely:
- Unbonded: when LUNA tokens are in this phase it means that they can be freely traded within the Terra ecosystem.
- Bonded: LUNA tokens in this phase are staked and therefore frozen, they cannot be mobilized.
- Unbonding: this is a phase LUNA tokens that have previously been staked for 21 days will be “unlinked”. During this period, the tokens will not produce a reward and cannot be mobilized either. Once this phase is over, the tokens remain in the Unbonded phase.
What were the Terra Stablecoins?
Terra Stablecoins were generated algorithmically within the Terra ecosystem. The Terra generation system asked to burn LUNA tokens in order to generate a number of stablecoins supported by the Terra platform.
"Burning" instead of "freezing" tokens was the main difference between Terra Stablecoins and other systems such as MakerDAO's and its DAI stablecoin, where a number of tokens are injected, overcollateralized and DAI stablecoins are obtained in exchange.
The idea of burning LUNA tokens to create stablecoins allowed:
- The value of LUNA increased and maintained a flow of tokens adjusted to the realities of the Terra market.
- A parity of value between the stablecoins generated in Terra and the total of LUNA tokens within the system is maintained.
- A financing mechanism for the project was created, since in the process of burning LUNA tokens, the commissions were assigned to the Treasury of Terra where they could be used in the future development of the protocol.
For example, if you wanted to create 2.000 UST, you had to have a little more than 2.000 US$ in LUNA tokens. This allowed you to generate the UST tokens, while the system burned your LUNA tokens and assigned the commission to the Terra treasury. After the process, the UST tokens were sent to your wallet.
Now, when referring to the Terra Stablecoins, the unique ability of Terra to generate not only dollar-pegged stablecoins (such as TerraUSD – UST), but also the ability to create TerraKWR (KRT) and 17 other coins that could be generated and mobilized within the system.
DeFi on Terra: Anchor Protocol and Mirror Protocol
Terra's possibilities thanks to its stablecoins were immense. In this sense, it is interesting to see how large DeFi protocols were deployed on this network.
The first one was Anchor protocol, a liquidity market where you could use stablecoin UST. In Anchor Protocol you could make loans, exchanges, obtain returns at a fixed interest rate based on the trends presented within the market.
Why has this system caused such a stir? Well, at the time of writing the first version of this article, Anchor Protocol had a TVL (Total Value Locked) that exceeded 4,7 billion dollars.
However, after the fall of LUNA and UST, Anchor Protocol's TVL has plummeted to almost zero.
The second case is MirrorProtocol, a project focused on creating a synthetic asset exchange that operates on the Terra network. This is a much more elaborate and specific product, but one that demonstrates Terra's potential as a first-rate DeFi platform.
What happened to LUNA and UST? Why did they fall?
In early 2022, Do Kwon announced the release of the Moon Foundation Guard, an organization whose goal was to create and manage the reserves that would keep UST, Terra's stablecoin, pegged to the dollar.
In February, the Luna Foundation Guard raised $1.000 billion in funding through the sale of LUNA tokens. Do Kwon's plan was to have a total of $ 10.000 billion in Bitcoin to maintain the parity of the UST with the US dollar.
In the event that UST lost its peg to the dollar, part of the Bitcoin reserves would be sold and, with the profits, more UST would be bought. On the other hand, if the value of the UST exceeded that of the dollar, the remaining UST would be sold and Bitcoin would be bought.
In March, the foundation begins to make large purchases of Bitcoin, which also extend throughout the month of April, reaching a total of $ 2.300 billion in Bitcoin. These large purchases cause the price of LUNA to reach a $119 ATH in April.
UST and Anchor Protocol
On the other hand, the main (and practically only) use case of the UST was staking in Anchor protocol, which promised a interest up to 20%. However, Proposition 20 was implemented in March, which gradually reduced interest in Anchor Protocol as reserves fell.
Proposition 20 stated that if Anchor's reserves increased by 5%, the interest rate also increased. However, if the reserves fell by 5%, the interests fell. Regardless, the interest rate was scheduled to decline 1,5 percentage points each month, as long as there were more lenders than borrowers on the protocol.
April 23, more than 70% of all UST in circulation was deposited in Anchor Protocol. The excess of UST in Anchor Protocol caused a drop in interest. On the weekend of May 6-8, nearly 3 million USTs left Anchor.
Holders were only in UST because of the high interest in Anchor Protocol, so the massive exits meant that users had completely lost interest in UST.
The link between LUNA and UST
One of the ways out of UST is Terra's “burn and mint” mechanism. This mechanism allows exchange 1 UST for 1 dollar in LUNA, burning the UST in the process. The problem with this mechanism is that the massive departures of UST caused the supply of LUNA grew excessively, causing the price of LUNA to plummet.
With each UST that was burned, more LUNA were minted, as the price of LUNA was getting lower, more tokens needed to be minted, creating a kind of “death spiral”. At one point, the price of LUNA was so low that the network did not have enough liquidity to pay for UST exits.
At the same time, as the burning and minting process requires the involvement of validation and transaction payment nodes, the network became so congested that exchanges had to halt LUNA transactions.
Finally, on May 13, Terra validators crippled the blockchain at block height 7.670.789 to prevent possible attacks. By then, the price of LUNA tokens was almost zero.
The Terra blockchain was officially halted at a block height of 7603700.https://t.co/squ5MZ5VDK
— Terra 🌍 Powered by LUNA 🌕 (@terra_money) May 12, 2022
Terra validators have decided to halt the Terra chain to prevent governance attacks following severe $ LUNA inflation and a significantly reduced cost of attack.
Proposition 1623 and fork of Moon
On May 17, Do Kwon presented "Proposition 1623" in which he raised the idea of voting to fork the Terra network and create a new blockchain, Terra 2.0, in which there would be no stable currency and which would be dedicated to hosting the Web 3 and DeFi projects, whose token is now called LUNA2. On the other hand, the old blockchain is renamed Terra Classic and its token Luna Classic (LUNC).
Despite the fact that much of the community was against the fork, the 25th of May passed with 65,5% of the votes in favor and only 13,2% against. Votes were based on LUNA token holdings, at the rate of one vote per token.
The Terra 2.0 network was scheduled to launch on May 27. However, it was delayed one day due to unspecified difficulties in development. The launch of the new blockchain was accompanied by an airdrop of LUNA2 tokens at the rate of:
- 30% to the community fund.
- 35% to LUNA holders before the attack.
- 10% to UST holders before the attack.
- 10% to LUNA holders after the attack.
- 15% to UST holders after attack.
The new LUNA2 token has a total supply of 1.000 billion and was launched with a price of just over $20. However, in less than 12 hours, the value of the token plummeted 70%, trading below $6.