What Is LUNA and UST? A Guide to the Terra Ecosystem

The Terra ecosystem has several notable protocols based on the UST stablecoin, particularly in the DeFi space. In the U.S. the discussion over stablecoins has intensified in recent months, with everybody from Treasury Secretary Janet Yellen to SEC Chair Gary Gensler stressing the need for action. The challenge is putting enough controls in place to mitigate consumer and economic risks, while also respecting investors’ privacy and customer rights. Terra has a whole stable of stablecoins, including a Terra U.S. Dollar (UST), Euro (EUT), Canadian Dollar (CAT), and Japanese Yen (JPY). UST’s de-pegging also attracted renewed attention from regulators.

Luna airdrop distribution​

When it comes to its consensus mechanism, Terra is structured as a Delegated Proof-of-Stake (DPoS) algorithm. This means that the Terra blockchain has various validators — currently 130 — and they bond their own Luna to propose Terra blocks. Luna token holders can delegate their Luna tokens to validators by staking their tokens. The validators’ influence (and payout) is determined by the amount of Luna tokens that are delegated to them. The more tokens are delegated to a validator, the greater the validator’s rewards are. While the protocol currently relies on a set of 130 validators, determined by who has the biggest stake delegated, the network is due to see an increase to 300 validators in the future.

Staking​

Tether is what’s called an off-chain collateralized stablecoin, which means it should be backed by non-cryptocurrency bank deposits. They are called algorithmic stablecoins and are backed by the LUNA token. Stablecoins are digital currencies that are pegged to conventional assets like U.S. dollars or gold.

The consensus algorithm is Proof-of-Stake and uses the Tendermint consensus. In short, the environment is scalable, secure and transactions are fast. I’m a technical author and blockchain enthusiast who has been in love with crypto since 2020. The arbitrageurs can then sell that UST on the open market to capture the profit.

• One of them was Daniel Shin, the founder and CEO of TMON, one of South Korea’s largest e-commerce platforms.
• In May 2022, these questions were thrown into sharp relief as Terra’s native stablecoin UST lost its dollar peg amid a wider crypto market crash.
• Terraform Labs does not make money from transactions using its crypto and instead relies on outside funding to operate, Kwon said.
• It first gained traction among South Korean e-commerce platforms because it offered cheaper transaction fees than most credit card companies and payment processors.

Phases of Luna​

Holders ripple ceo brad garlinghouse in interview with julia chatterley on cnn of LUNA tokens can stake their tokens in the Terra ecosystem’s consensus mechanism. By staking LUNA, users receive rewards taken directly from swap fees on the Terra protocol. Users pay these fees any time they switch between LUNA and a Terra stablecoin. Algorithmic stablecoins are a relatively new way of pegging cryptocurrencies to any fiat currency.

Validators monitor each other closely and can submit evidence of misbehavior. Once discovered, the misbehaving validator will have a small portion of their funds slashed. Offending validators will also be jailed or excluded from consensus for a period of time. Even simple issues such as malfunctions or downtimes from upgrading can lead to slashing. To start receiving rewards, delegators bond their Luna to a validator. The bonding process adds a delegator’s Luna to a validator’s stake, which helps validators to participate in consensus.

This process repeats, adding new blocks of transactions how to buy a katana to the chain. Each validator has a copy of all transactions made on the network, which they compare against the proposed block of transactions before voting. Because multiple independent validators take place in consensus voting, it is infeasible for any false block to be accepted. In this way, validators protect the integrity of the Terra blockchain and ensure the validity of each transaction.

In a scenario where UST consistently trades below $1, arbitrageurs buy UST, burn it for Luna tokens and sell them off-chain. Should Luna drop unexpectedly fast, investors could lose confidence, so they will burn their UST for Luna (at a fixed ratio of $1) and then sell Luna tokens. With every UST burned, $1 worth of Luna what is a white-label broker in forex must be mined, which means more Luna tokens are being created as its price falls. Market participants are offered the possibility to exchange UST and Luna at any time on-chain at a fixed exchange rate. More precisely, a dollar’s worth of Luna can be burned anytime with one UST being mined in return.

If a loan falls under its loan-to-value ratio (LTV), it will be liquidated. Anchor targets to reach its so-called Anchor Rate as an interest rate objective. To do so, its smart contract dynamically divides block rewards from collateral bAssets between borrower and depositor.

What is Terra? Your guide to the hot cryptocurrency

Besides stablecoins, the other pillar of the Terra chain is LUNA, the native coin that plays different roles. The mainnet release of Terra’s public blockchain network happened on April 24, 2019. However, the project was originally founded in January 2018 by two South Korean entrepreneurs. Terra is currently the world’s 11th largest cryptocurrency on the market, with a market capitalization of $15.6 billion, and $8.6 billion in total value locked across protocols on the network. To become a miner or a validator in Terra, users must either bond (lock for a minimum of 21 days) their own LUNA tokens or have other users delegate their LUNA stakes. LUNA stakers can delegate their tokens to validators to become delegators.