The Luna crypto is based on the Terra blockchain, which uses fiat-pegged stablecoins to support a global digital payment system. More importantly, Luna is a part of a unique dual token system alongside the TerraUSD – the former has been developed to reduce the risks associated with the latter.
LUNA token holders stake their coins as collateral on the Terra blockchain and earn rewards for every transaction they validate on the network. Moreover, the Terra blockchain has the capability to run its own decentralised apps.
Read on to know more about Terra and Luna cryptocurrencies and how they work together.
Luna crypto is a native cryptocurrency of the Terra blockchain. Each blockchain has a single native coin that forms its backbone, while it can have hundreds of crypto tokens on it. When the Luna coin was launched on various cryptocurrencies in 2019, it was hailed as one of the most successful decentralised finance (DeFi) currencies.
The main function of the Luna cryptocurrency is to act as collateral for Terra’s stablecoins, which will ensure a stable price level for Terra’s users and investors. To maintain this price level, investors are incentivised to keep trading these stablecoins as well as Luna to increase or decrease their supply. If anything goes wrong with Terra’s stablecoins, Luna would be used to absorb their volatility.
In addition, Luna holders can pledge their tokens to its network. By staking coins, one can receive a portion of transaction fees collected by Terra for using its stablecoins. There is little risk in staking Luna cryptocurrencies as investors can unstake cryptos within 21 days.
Most cryptocurrencies tend to be highly volatile, which limits their everyday use. Sister cryptocurrencies like Luna and Terra crypto aim to maintain a stable price so people can use them to transfer funds and buy goods and services.
Terra is the name of a decentralised payment blockchain project that was built on the Cosmos algorithm. The Terra blockchain was introduced in 2018 in South Korea by Terraform Labs. An entrepreneur and investor, Daniel Shin, along with Do Kwon, founded the Terra ecosystem after acquiring US$32 million in funds from Binance, OKEx and Huobi.
The main focus of the Terra blockchain is stablecoins – cryptocurrencies that are pegged to other assets like fiat currencies. Terra crypto or TerraUSD (UST), which is pegged to the US Dollar, is the most widely used stablecoin in the Terra ecosystem. Terra also offers stablecoins pegged to other currencies like the Euro (EUR), South Korean won (KRW) and the Mongolian tugrik (MNT).
The Terra network seeks to alleviate many of the problems faced by stablecoins. It leverages a native token, smart contracts and an Oracle system to offer various advantages over other cryptocurrencies. The following are some of the advantages offered by the Terra blockchain:
The Terra blockchain offers stablecoins, which are designed to combine the stability of fiat currencies with the decentralised nature of cryptocurrencies. These coins are pegged to a fiat currency in a 1:1 ratio to minimise the risks of price fluctuations.
Terra and Luna cryptocurrencies are two mutually dependent tokens that aim to achieve price stability against the US Dollar. One must ‘burn’ Luna to mine UST (TerraUSD) and can swap Luna to get UST. If UST’s value increases above USD 1, its demand will increase, leading to more people ‘burning’ Luna. In contrast, if the price of UST dropped below USD 1, more holders would swap it for Luna, which would eventually make UST more valuable.
Thus, the burning of Luna coins is essential to maintain the stability of TerraUSD.
After a bullish run in 2021, Luna managed to resist the pressures of a market-wide downturn in early 2022. However, in early May 2022, both the UST stablecoin and the governance token Luna came under considerable selling pressure.
Luna’s price crash was further aggravated by a wider bearish crypto market. Luna’s value subsequently went below USD40 levels and hit an all-time low in the third week of May 2022. The Luna token price was declining by over 50% per day. As a result of this crash, TerraUSD lost its USD1 peg.
This collapse happened due to the UST stablecoin losing its USD1 peg for a long period. The primary rule that made the Terra and Luna coins stable was UST’s fixed price at USD1. With the Luna coin price crash being one of the biggest crashes in crypto history, many investors lost their faith in Terra’s projects.
After the price of the Luna crypto fell to near zero, the CEO of Terraform Labs, Do Kwon, proposed a revival plan to bring back the cryptocurrency on its earlier track. The first proposal by the CEO to burn UST was rejected as he had planned to burn more UST than possible.
The second proposal to recover Luna involved creating an entirely new blockchain while leaving behind its failed stablecoin. The new blockchain and its native cryptocurrency would retain their old name. Terraform Labs rebranded its project to Terra Classic while renaming ‘LUNA’ to ‘LUNC’ and ‘UST’ to ‘USTC’.
Many decentralised apps offered their support for this plan, including BTC Secure and Nebula Protocol. Whether this plan would result in recovery is something that would become clear in upcoming months.
The Luna crypto created an innovative way to stabilise price fluctuations – using a dual-coin system. However, its recent price slump has created an environment of doubt for crypto creators. It is advisable for individuals to exercise caution and do sufficient research before investing in cryptocurrencies.
Ans: Terra is the blockchain that houses various stablecoins, like the TerraUSD and Luna. On the other hand, Luna is a cryptocurrency of the Terra blockchain that pegs the value of UST at USD1.
Ans: Currently, the Luna crypto has been delisted on most crypto exchanges. However, you can still buy it on a few exchanges like the FTX.
Ans: In March 2021, Terra launched its anchor protocol to allow its stablecoin holders to earn rewards. Holders could earn interest of around 20% from deposits of their Terra-based stablecoins.
Ans: Yes, the anchor protocol allowed short-term loans for borrowers if they put down liquid-staked PoS assets derived from major blockchains as collateral.
Ans: Terra and Luna cryptocurrencies use a delegated PoS (Proof of Stake) consensus mechanism where validators have to approve transactions and add new blocks to the blockchain.
Disclaimer: Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions.
Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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