- In 2018, Terraforms Labs and its cofounders, Do Kwon and Daniel Shin, created the open-source blockchain platform, which gained immense popularity, especially among younger generations
- Although LUNA was the first native coin, the open-source blockchain platform created multiple stablecoins, such as TerraKWR, TerraJPY, TerraCNY, TerraEUR, TerraGBP, and TerraSDR
- Currently, the most popular stablecoin in Terra is UST.
- Many individuals have speculated that the open-source blockchain platform might not maintain its $1 value
There have been numerous cryptocurrency exchange platforms over the years. Some have grown tremendously and retained their popularity to date, such as Binance.
Others sparked the interest of many users but, along the line, have faded away slowly. Terra, once renowned as a big shot in the cryptocurrency world for its open-source blockchain technology, Luna and TerraUSD coin, is now but a struggling company.
What is Terra
Terra is an open-source blockchain payment platform that supports and facilitates the use of stablecoins. These are crypto coins whose value is pegged on tangible assets’ price.
Its algorithm and protocol allow stablecoins to be created and designed to track the price of the fiat currency consistently. In 2018, Terraforms Labs and its cofounders, Do Kwon and Daniel Shin started the open-source blockchain platform. At the time, it gained immense popularity, especially among younger generations.
Terra’s native coin Luna
The founders of Terra initially intended for the exchange platform to fulfil Bitcoin’s goal; an efficient peer-to-peer electronic cash system. To achieve this, Terra created its first native cryptocurrency, LUNA.
Terra used the token for staking and governing and acted as collateral for the network’s stablecoin. This, in turn, was used to maintain the price of its stablecoin by reducing the network’s crypto volatility.
In its first years, LUNA experienced a surge in popularity, having risen to $89 by the end of the year.
Although LUNA was the first native coin, the open-source blockchain platform created multiple stablecoins such as TerraKWR, a stablecoin based on the South Korean won, TerraJPY, TerraCNY, TerraEUR, TerraGBP, and TerraSDR. Currently, the most popular stablecoin in Terra is UST.
Unlike other stablecoins such as USDC and USDT, UST is an algorithmically stabilized coin. This means that an internal smart contract algorithm is the core component to maintaining the price of TerraUSD. It accomplishes this task by burning or permanently destroying LUNA tokens to create or mint new UST tokens.
The technical term for this process is arbitrage. It is the process of obtaining small profits by finding differences between asset prices on different exchange platforms. However, it is applied differently in Terra since it tries to maintain a 1:1 ratio between LUNA and TerraUSD.
The swapping process effectively burns LUNA tokens reducing their number in the overall token circulation, making them more scarce and valuable. If the value of UST ever rose above $1, it would effectively also increase the value of LUNA. The swapping process dilutes the number of tokens reducing the value to $1. The open-source blockchain platform makes a similar approach if its stablecoin demand declines.
Why did Terra’s fame plummet
The open-source blockchain platform experienced a massive loss brought about by the Luna crypto crash, mainly caused by its connection to UST.
On May 7, Terra experienced a massive loss having to un-stake over $2 billion worth of UST. This forced it to liquidate most of its stablecoins. There was no clear verdict as to why they did this, but it came with various repercussions. This caused the UST value to drop to $0.91 from $1, equivalently discarding its 1:1 ratio value.
This de-pegged the UST, causing more people to abandon the UST, which led to the increased creation of LUNA tokens, further devaluing it. This impacted the cryptocurrency network negatively and reduced bitcoin’s value which caused an estimated $300 billion. Various crypto companies, such as Voyager and Celsius, ended up banking for bankruptcy.
As a result, multiple crypto traders lost their life saving and causing a significant decrease in the crypto ecosystem.
How is Terra recovering
Since the massive loss, Terra has made various efforts to rekindle positive investor sentiment and crypto morale. It has set its eyes on rebooting its network to ensure that its users who had been affected by the crash would be able to revver.
Terra plans to disburse a quarter of its tokens to retain users, reward their loyalty, and help their company.
Many individuals have speculated that the open-source blockchain platform might not receive its $1 value. Their analysts have stated by the end of the year, the LUNA token will have an average price of $0.00012 and will climb slowly over the next three years.
Unfortunately, many have already given up hope for the stablecoin, but others still share a longing for a positive impact in the coming years.