What Is Terra (Luna) and How Does It Work?

2021/10/07 06:52:20

Terra is a DeFi focused blockchain creating a standalone decentralized financial infrastructure using financial primitives such as stablecoins (Terra UST), payments (Chai), earnings (Anchor) and investing (Mirror). Unlike other DeFi protocols, Terra offers an entire ecosystem for users and developers to participate and benefit from the DeFi products.

Since 2020, the DeFi ecosystem is growing at a phenomenal rate, surpassing $128 billion in market capitalization during the bull market in April 2021. If we compare DeFi to the ICO boom of 2017, the total value locked (TVL) far exceeded the amount of funds raised in all the ICO campaigns combined.

DeFi TVL compared to ICO investments | Source: Coindesk

What Is Terra Blockchain?

Terra is a Proof of Stake (PoS) blockchain built on top of Cosmos SDK using Tendermint core, supporting stable programmable payments and open financial infrastructure development. LUNA is the native platform token of the Terra protocol that is used to collateralize all the stablecoins in the Terra blockchain ecosystem using a seigniorage model that maintains a fiat-peg and minimizes price volatility.

The seigniorage model for issuing currency is widely used in traditional financial markets. In simple terms, it is the difference between new minted currency and the cost of acquiring collateral. If a single US dollar costs $.05 to produce, the remaining $.95 difference is the profit which is called the seigniorage. Terra issues its stablecoins using the seigniorage model, and adds all the profits to Terra seigniorage pool to fund projects in the ecosystem.

LUNA achieves a peg of stablecoins using expansion and contraction methods. If the Terra stablecoin (UST) is above $1 peg, the supply is contracted by maximizing the amount of collateral (LUNA) required to mint an equivalent amount of UST. Similarly, if the UST is below the $1 beg, the supply is expanded by minimizing the LUNA collateral required to mint UST tokens.

Aside from serving as the collateral, the LUNA token is also used for staking and platform governance. LUNA tokens holders can enjoy staking rewards in three forms: gas (compute fees), taxes (transaction fees), and seigniorage rewards from the issuance of stablecoins. LUNA tokens exist in three states:

  • Unbonded (freely tradeable).
  • Bonded (these are the locked LUNA tokens that generate rewards).
  • Unbonding (the tokens are in the process of unstaking).

Source: Terra.money

Terra Ecosystem

Terra has a growing ecosystem of applications around payments, earnings and investments that increase the demand for the network’s underlying stablecoins that is trickled down to the LUNA token holders as they earn higher staking rewards from high network utilization.

Some of the core Terra ecosystem applications are:


Chai is the largest e-commerce wallet in Korea that enables merchants and retailers to accept digital payments via 20 different payment methods (debit card, credit card, PayPal, etc). Chai is super fast because Terra uses it’s stablecoins on the backend to settle all the transactions in a fast and secure manner.

Chai generated over $2 billion annual revenue with more than 2 million users on the platform.


Mirror is a synthetic assets protocol built on top of the Terra blockchain that provides exposure to different types of asset classes such as commodities, ETFs, US stocks, and cryptocurrencies. All the assets on the platform are represented by mAssets (Mirrored Assets) that relay the price of the underlying original asset.

Mirror was launched in December 2020, and has accumulated $2.3 billion in TVL and $1.2 billion in liquidity on the platform in such a short period of time.


Anchor is a savings protocol built on the Terra platform that offers yields on stablecoin deposits. Depositors are incentivized with the Anchor token (ANC) according to an Anchor Rate (the APY for each depositor). The Anchor rate is derived and funded from other Proof of Stake blockchains as staking rewards, which is then distributed among the depositors as a yield.

As of writing, the Anchor protocol has over $1 billion in total value locked (TVL).

The Terra Team

Terra blockchain protocol was developed back in January 2018 by Terraform Labs (TFL), which is a South Korean technology company. Daniel Shin and Do Kwon are the two co-founders of Terraform Labs with a solid background in technology and startups.

Terraform Labs has attracted a lot of VC investment lately, and they have secured financing rounds from the likes of Galaxy Digital, Coinbase Ventures, Pantera Capital, Arrington XRP Capital, PolyChain Capital, Binance Labs, Huobi Capital, FBG Capital and TransLink Capital.

Closing Thoughts

Terra is a promising platform building a complete ecosystem with stablecoins and various applications for the decentralized financial world. With a focus on utility and application, the LUNA token can become more valuable over time as more people use the Terra platform through front-facing applications such as Chai, Mirror, or Anchor.

Do you think Terra will compete with some of the best Ethereum-based DeFi protocols?

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