Terra Money is a decentralized system focused on enhancing the DeFi space through programmable payments in oder to drive adoption.
Decentralized finance (DeFi) is an evolving field. Projects are being launched to level every aspect of the DeFi sphere. For example, while some protocols are keen on providing automated market making, others opt to provide the building blocks to create DeFi platforms.
Polkadot, for instance, is a system powering cross-chain communication. Terra Money is another platform focusing on “powering the innovation of money.” The protocol has different spheres that include a native currency, a smart contract platform, and a staking system.
To understand Terra, let’s look at its different sections.
What is Terra Money?
Terra Money is a decentralized system focused on enhancing the DeFi space through programmable payments in oder to drive adoption. The protocol has a native token, Luna (more on the token later), and is backed by a host of fiat-pegged stablecoins. By employing stablecoins, Terra presents a payment infrastructure void of the shortcomings of traditional payment methods such as credit cards and old blockchain-based payment systems.
Although payments are Terra’s key contribution, it’s also built around providing a transparent ecosystem which includes logistics.
Luna: Terra Protocol’s Native Currency
The network has a native token called Luna. Luna is used to, among other things, to provide collateral for the purpose of stabilizing the price of Terra-based stablecoins.
Luna has a total supply of 994,871,354 tokens, with 25 percent of it already staked. The token is listed on leading cryptocurrency exchanges such as Binance and Huobi.
Other Luna Use Cases
Paying for gas
Transactions on the Terra protocol incur gas fees. The fees are meant to prevent malicious actors from spamming the network. Furthermore, validators determine Terra’s minimum gas fees.
With each new block added to the chain, validators earn a compute fee in regards to their stake muscle.
Paying for Usability fee
Also referred to as taxes on the platform, the usability fee is charged on every transaction at a rate between 0.1 and 1.0 percent. Taxes are payable in Luna or any other currency on the network. Moreover, its circulation is based on a validator’s stake.
Terra supports staking and allows Luna holders to delegate their coins to help in securing the platform. Apart from paying staking rewards in Luna, the rewards are also meant to incentivize the investor to hold the token for the long term. Staking incentives are deposited with the validators, who then distribute them to delegates after taking their cut.
As with most proof of stake (PoS) platforms, the percentage of staking rewards is proportional to the number of coins staked. Incentives from staking are harvested from seigniorage, gas, and taxes. The annual yield for staking currently stands at 11.17%.
With the Luna staking system inspired by the Cosmos network, staked tokens have a 21-day lockup period.
Terra runs a Seigniorage pool that is used to pay validators for engaging with oracles and the exchange of Luna.
The Three States of Luna
Terra’s native token can exist in three dimensions. To generate rewards, new Luna tokens must go the full cycle. The three states are unbonded, bonded, and unbonding.
Unbonded Luna is free for trading between investors, while bonded tokens are those that are in active staking.
Lastly, the unbonding state is for tokens between bonded and unbounded states. Note that the unbonding stage takes 21 days before the coins can be traded or staked/bonded again.
Terra’s key Participants
The Tendermint PoS consensus powers Terra. As such, validators are the key ingredients in ensuring the security of the network. The Terra protocol provides a specialized architecture that allows validators to meet the system’s transaction finality, security, and scalability.
However, it’s not all rosy for validators. They have to behave as misbehaving results in a penalty that sees the validators’ stake slashed. Key considerations for validators are security and less or no down-times.
A validator can also be penalized for signing a block twice and repeatedly not accumulating enough oracle votes.
Although the platform supports staking, coin holders must delegate their holdings to a validator who then directly interacts with the network. The amount staked by a validator indicates their voting power on the system. The leading 100 validators, by staking strength, are called delegates and are the ones who validate transactions.
Uses of Stablecoins on Terra
As seen earlier, Terra focuses on stablecoins. These stablecoins have different uses on the platform. For example, they are used for:
- Price Stabilization – Here, they are used to maintain a level ground between demand and supply through algorithmic adjustments. These adjustments include allowing for protocol-level market-making through Luna swaps. This drives an expandable monetary policy.
- Miner Incentive Stabilization – Terra’s price volatility comes from the stability of mining demand. Therefore, mining incentives are directly connected to the ecosystem’s economy.
As such, miners may not be willing to stake their holdings in case of adverse volatility in mining incentives. Stablecoins are used on the network to stabilize both mining rewards and demand for Luna tokens.
- Powering Money Innovation – The system uses stablecoins to power money innovation by offering a reliable peg to fiat currencies. In addition, stablecoins ensure a balance between collateral and currency.
How Terra Money Handles Governance
Governance is a crucial aspect of all DeFi-focused protocols, including Terra. On the platform, governance enables changes to be implemented on the network by voting on proposals. These proposals come from the Terra community, with every submission having an initial deposit.
Supported recommendations include those targeting to update the reward weight monetary policy, blockchain parameters, and tax rate. Terra also has manual proposals that touch on huge directional changes.
Manual suggestions are in the form of plain text and can be voted on. Unlike on-chain proposals, manual recommendations require manual/human involvement.
The Terra Alliance
This is a group of e-commerce companies such as CHAI, spread across the world. The alliance serves as a payment network and already has attracted 25 billion US dollars from 45 million users in the Asian region. Its main function is to drive adoption from both a customer and vendor perspective by simplifying the onboarding process.
Terra Smart Contract Platform
Terra sets itself apart by powering smart contracts that are free from price volatility. Hence, the contracts can be used for conventional financial applications. Consequently, the protocol supports high-level decentralized applications (Dapps) that make use of Luna.
Dapps on the network receive seigniorage from the Treasury. However, they have to request the funds, and funding is influenced by the Dapps’ role in the ecosystem and the reason they need the funds.
A Dapp funding request involves:
- The Dapp applying for a Treasury account.
- Going through a voting process that involves validators. Dapps’ proposal to get funding must garner more than a third of the votes.
- Note that validators have the power to decide who opens an account with the Treasury. Also, depending on the Dapps’ behavior, validators can request its blacklisting. Some of the reasons that can lead to blacklisting include behaving dishonestly and failing to account for funds allocated and/or spent.
By providing a stablecoin ecosystem, Terra Money provides a crucial building block in driving massive DeFi adoption. Apart from supporting staking, the network incentivizes stakers and miners by controlling volatility using stablecoins. Staking rewards encourage Luna investors to participate in the network’s security by delegating their tokens to validators.
All in all, the project is a great addition to the DeFi space, and one of its most promising underdogs.