Terra (LUNA) – the next innovation in money is now here!
One cryptocurrency is creating a world of connected stablecoins: Terra (LUNA). Unlike regular cryptos, they keep their prices constant, so they’re a lot easier to spend. As a result, they could further spread crypto adoption around the world. This is why you’ll see several stablecoins among the cryptocurrencies available.
Stablecoins have been around for a long time, but they’re due for a major upgrade. The old ways of keeping the coins stable aren’t enough anymore. This is one of the improvements the Terra (LUNA) network has brought to the cryptocurrency space, and its features may convince more people around the world to use cryptos.
We have to start talking more about stablecoins before discussing Terra (LUNA). We understand that not everyone knows about cryptocurrencies, let alone stablecoins, and this will make it easier for readers to understand how this stablecoin works. Then, we will go through its other functions and issues to see if you should invest.
Why are stablecoins a big deal?
The first cryptocurrency is bitcoin (BTC), intended as a decentralized digital currency, and this means it will not need a government or company that looks over the system.
Instead, it relies on computers owned by regular folks volunteering to operate the whole network called a blockchain. In return, they receive cryptocurrency.
Unfortunately, cryptos are known for their high volatility. Believe it or not, prices can shrink by half or increase threefold within minutes! Imagine if your money’s value acted this way!
This is why stablecoins drew attention in the crypto space. They’re cryptocurrencies tied or pegged to another asset with a more stable value. Here are the types of stablecoins:
- Fiat-backed – These are also called fiat-pegged stablecoins, and they’re tied to the value of other fiat currencies such as the US dollar. One famous example is Tether (USDt).
- Commodity-backed – Some people invest in precious metals like gold and silver to hedge against inflation. These stablecoins work similarly because they are pegged to these materials. Yet, they’re much easier to spend.
- Crypto-backed – Some stablecoins are tied to other cryptocurrencies, specifically bitcoin and ethereum (ETH), since they’re the biggest ones right now.
- Algo-based – Think of these as “math-collateralized” stablecoins, which adjust to market demand using smart contracts and math formulas.
They usually maintain value by keeping a larger supply of pegged reserves. If you observe their charts, though, this isn’t foolproof. Stablecoins like Tether have huge price spikes too!
Many things could cause this, such as an unstable reserve. As we said, stablecoins could tie their value to bitcoin. Its value can move up and down too, bringing the stablecoin with it.
It’s one of the reasons why stablecoin prices don’t always stay the same. Many people have been looking for a way to fix this, and one crypto might just succeed: Terra.
Read More: How Stablecoins Calm The Crypto Market
What is Terra (LUNA)?
This is where the Terra stablecoin provides a solution. Do Kwon and Daniel Shim from Terraform Labs created it in 2018.
It works like a mix between the fiat-backed and algo-based stablecoins. It’s tied to fiat, but math maintains the price.
Unlike most cryptos, the Terra network has Terra and LUNA tokens, and they’re the ones that make its unique model possible. Here’s how they work:
- Terra – It’s the fiat-backed stablecoin of the network. For example, the TerraUSD (UST) is tied to the US dollar. You could create or “mint” them with the help of LUNA tokens.
- LUNA – When crypto investors mention LUNA or Terra, this is what they’re talking about. It’s the token that keeps the fiat-backed Terra at a constant price.
You will have to convert LUNA tokens to get Terra in exchange. The value of UST rises or falls so that the price may become higher or lower than the US dollar.
Arbitrageurs keep the price constant by taking advantage of this difference. They buy and sell LUNA, which adds or deducts from the UST supply. In turn, the UST value stays the same.
In other stablecoins, you will have to keep a huge supply of the pegged asset. If you want to expand its use, you will have to increase the reserves.
This means growing those projects will cost a lot of money, limiting how much the stablecoin can grow. You’ll notice this problem in other ones like MakerDAO.
The LUNA token gets rid of the need to have too many reserves. As a result, it’s easier to expand the Terra model, and you won’t have to spend as much.
On the other hand, the LUNA token plays various roles in the network. Aside from keeping the Terra price, here are its other functions:
- You need to pay transaction fees with it.
- You can stake LUNA tokens to earn passive income.
- Staking them lets you submit and vote on changes to the Terra network.
What makes Terra (LUNA) great?
It’s hard to find a real-world use for other cryptos. This is where the Terra network sets itself apart, and it enables popular payment systems in South Korea and Mongolia.
Terra is present in South Korea’s Chai app and Mongolia’s MemePay app. In the latter country, taxi riders pay their drivers with TerraMNT tied to the Mongolian tugrik.
Payment methods like these are part of decentralized finance or DeFi. It’s the way cryptos are transforming the way we use money. Another example is crypto lending.
That’s not the only thing that it can do, though. Here are some of the other things the Terra (LUNA) system can do:
- Works with other cryptos – It lets people send and receive assets from one network to another. Right now, you could use it with Ethereum and Solana (SOL).
- Mirror Protocol – Terra makes assets called “synthetics” that follow the price of other assets. Also, you can trade and use them on the Terra network. The recent Columbus-5 upgrade improved this feature and rocketed the LUNA price to an all-time high!
- Low costs, high speed – The transactions only take six seconds to work, and they only cost a few cents.
- Great for staking – You could earn up to 20% more LUNA from staking. It’s hard to find gains like that in other cryptos or from even a bank!
What are the issues with Terra (LUNA)?
Columbus-5 is ~22 days away.
A deluge of projects enveloping $UST and providing diverse sources of demand are ready to launch after Col-5.
— Terra 🌍 Powered by LUNA 🌕 (@terra_money) August 17, 2021
You can’t find any investment without any downsides. Yet, you should look for ones with risks that you’re willing to accept. Here are the issues you may face with Terra:
- Adoption – Terra is having a hard time growing outside Asia because it would have to beat other cryptos like Ethereum. These had been around longer, allowing them to take over large parts of the market. Terra will need to step its game up!
- It’s a bit centralized – Terra picks the nodes that keep the network running. It makes transactions cheaper and faster, but it goes against the whole point of crypto.
- No roadmap updates – We’ve only heard about an upgrade this year. At the time of writing, we can’t see what’s next for Terra. This is not a good sign if you want to hold LUNA tokens for a long time.
- Losing your stakes – You leave LUNA tokens with a validator that must follow Terra’s rules. Otherwise, you could lose all those coins! This is why you should be careful when staking. Though, you’ll see this issue in other coins.
It’s up to you if you’ll invest in Terra (LUNA) or not. This article is meant to inform readers, not provide financial advice. Have a plan before you invest in any asset.
If not for you, cryptocurrency exchanges have hundreds of other options. Take time to find the assets that fit your goals. Don’t use the money you’re not willing to let go!
For more crypto updates, check out other Inquirer USA articles. These provide overviews of other crypto coins and explain other trends.