Stablecoins are gaining attention as they now have multiple options you can pick from when choosing where to invest. Terra is a unique project that develops a smart approach to stablecoins and the tools developers can use to create their very own pegged token. It is the tenth-biggest cryptocurrency at the moment with a market cap of $22,361,934,486. Here is everything you need to know.
Terra is a growing network for financial applications. It is an open-source blockchain payment network for algorithmic stablecoins. It enables users to spend, save, trade, or exchange Terra stablecoins instantly. Basically, users can create stablecoins backed by fiat currencies. These coins primarily use the network’s seigniorage mechanism. It is both a blockchain network and a cryptocurrency. It has two cryptocurrency tokens under this protocol; the other one is Luna.
Terra (LUNA) was founded by Do Kwon and Daniel Shim of Terraform labs in January 2018 who sought to create a new type of smart money that’ll reflect the flexible nature of virtual assets. The network uses TendermintDelegated-Proof-of-Stake (DPoS) as its consensus mechanism. The network also provides the capability of smart contract for the creation of a wide range of different stablecoins.
The Terra protocol maintains the price of the Terra’s stablecoin by ensuring that supply and demand are always balanced. Luna is the variable counterweight to the Terra stablecoin that absorbs its volatility. To do this, the network relies on an elastic supply mechanism. Let’s say the network consists of a Terra and Luna supply pool. To maintain its price, Luna’s pool adds or removes from Terra’s pool, meaning users burn Luna to mint Terra and burn Terra to mint Luna. Get it? This process is achieved by the network’s algorithmic protocol, which stimulates the minting and burning of Terra through commercialized opportunities.
Basically, the network utilizes a programmable infrastructure to provide the market with self-stabilizing stablecoins and other unique features. To accomplish this task, the network relies on an elastic monetary supply mechanism. The platform automatically adjusts the supply of its stablecoins to ensure that their values remained pegged to their underlying assets.
When Terra is trading at a price that is relatively higher than its peg, it implies that the demand for the stablecoin is higher than supply meaning that supply needs to be increased so it can match the demand. The reverse situation occurs when Terra is trading at a price that is relatively lower than its peg, the implication is that there is more supply for the stablecoin than demand. This makes it necessary to reduce the supply until it matches demand. The network then motivates users to burn Terra and mint Luna, which has the effect of boosting Terra’s price by reducing the supply, and lower Luna’s price by increasing the supply. This process is kept ongoing by users until Terra trades at its target price.
02 Feb 2023
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