What Is Terra? All You Need To Know
Centralized stablecoins such as Tether are cryptocurrencies that are pegged to the price of another asset, in this case, the U.S. dollar in order to mitigate volatility and remain stable. And that is the whole point. By peeking under the hood of these stablecoins however, it becomes obvious for a fact that they are not as stable as they should due to their opaque governance issues.
Decentralized stablecoins on the other hand, are not pegged to other currencies. Instead of relying on reserves of cash and debt, they maintain their pegs through specific algorithms in order to avoid governance issues and complications of centralized stablecoins.
What is it?
Founded by Do Kwon and Daniel Shin and created by Terraform Labs in 2018, TerraUSD is now the eighth-largest cryptocurrency by market capitalization as of March 2022, that is pegged to the U.S. dollar as well, but through a network of arbitrageurs buying and selling the cryptocurrency. Terra, also confusingly known as LUNA, is a governance token as well, that grants holders voting power over the protocol.
How does it work?
Terra mints and burns tokens to maintain balance between supply and demand and keep prices stable. Here’s how it works in simple terms:
In order for one to buy UST, one will have to mint some and to do so, they will have to pay the going rate in LUNA, which is then burned by the network to put pressure on the supply to cause a slight increase in the price of LUNA. The same works in reverse: In order for one to mint LUNA, they will have to convert UST stablecoins first, which will also get burned by the network to help the price of UST go up. Using this mechanism, Terra provides a potential arbitrage opportunity, meaning: if, for example, UST falls to $0.95, traders buy an amount at that price and sell it for $1 LUNA to reduce UST supply, and in doing so, the price heads back up.
What is special about it?
Being built on the Cosmos ecosystem, Terra can be backed by independent app-specific miners and unlike Ethereum, there is no need for it to be secured by proof-of-work mining. What’s more, Terra uses a protocol that provides stocks that reflect the price of major U.S. firms called Terraform Labs’ Mirror Protocol, through which, investors can use Terra coins across blockchains.
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