Terra (LUNA) is a secondary token that powers the Terra blockchain. Terra aims to be the go-to decentralized stablecoin used throughout the globe for everyday purchases. As Terra 2.0 was released on May 28th, 2022, the old token got the name Terra Luna Classic (LUNC). At the same time, the original chain has been renamed Terra Classic.
The Terra project utilizes a two token system: Terra and Luna. Terra is a decentralized stablecoin pegged to a number of the world's major fiat currencies including the USD, KRW, CNY, GBP, and most importantly, the International Monetary Fund’s Special Drawing Rights (IMF SDR). The IMF SDR is an international reserve asset based on the value of five currencies — the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling. The Terra token is the unit of account for the Terra protocol.
Luna serves as collateral for the stablecoin, Terra, and provides security and stability to the network. Terra’s mainnet (which launched in April 2019) is built on Tendermint’s proof of stake (PoS) consensus mechanism. There are one hundred validators who have staked Luna tokens for the chance of securing and processing transactions for the Terra blockchain. The probability of becoming the next block producer is dependent on the size of the validator’s Luna stake. Validators are incentivized and compensated through transaction fees and seigniorage (the profit from minting currency). With all transactions on the Terra network, a small fee is paid to validators. Fees default to 0.1% and are capped at 1%.
In addition to staking, Luna is also used to stabilize the price of Terra. When the price of Terra rises above the target price (e.g., 1 SDR), the protocol must expand its supply, and when its price falls below the target price, the protocol must contract its supply. Contracting and expanding Terra’s supply means buying or selling Terra at its target price. In essence, the protocol uses Luna as a market maker for Terra. To buy 1 Terra, the protocol mints and sells Luna worth 1 SDR. By selling 1 Terra, the protocol earns Luna worth 1 SDR. As long as the protocol can maintain both sides of this contract, the price of Terra should remain stable at 1 SDR.
At the time of writing, the team behind the project is Terraform Labs, a Seoul-based company co-founded by Daniel Shin and Do Kwon. Before Terra, Shin founded multiple companies including TicketMonster, Fast Five, and FoodFly. Kwon was a startup founder (Anyfi) and has experience as a software engineer at Microsoft and Apple.
Terra has developed partnerships with over 15 platforms throughout Asia, including industry giants such as TicketMonster (eCommerce, South Korea), Woowa Brothers (food delivery, South Korea), Tiki (eCommerce, Vietnam), and Carousell (eCommerce, Singapore). Those partners, who together form the Terra Alliance, are interested in incorporating the Terra stablecoin into their businesses. In total, this alliance has over 45 million users and handles $25 billion in annual transaction volume.
In August 2018, four of the largest crypto exchanges - Binance Labs, OKEx, Huobi Capital, and Dunamu (which owns Upbit) - led a $32 million investment in Terra. Other investors included Polychain Capital, China’s FBG Capital, Hashed, 1kx, and Kenetic Capital among others. Instead of equity, the deal is a token-based investment round.