Terra’s three-month rally (LUNA) saw its token surge 674%, catapulting LUNA into the ranks of potential so-called “Ethereum killers.” LUNA has been on a roll lately because Terra’s most recent update, Columbus-5, has effectively overhauled its tokenomics and brought significant changes to its technology.
LUNA is currently in four place in total value locked (TVL) among other blockchains, indicating its growing popularity for decentralized finance (DeFi) applications and also supporting its long-term viability.
Terra is a layer one blockchain developed by South Korean startup Terraform Labs and was launched in January 2018. It has a payments-centric ecosystem powered by algorithmic stablecoins and aims to be the infrastructure for all applications that they are building Terraform Labs and the Terra Community.
Terra already offers public services in real life, particularly among merchants. Arrington Capital, Lightspeed Venture Partners and Pantera Capital have committed around $ 150 million to fund projects based on Terra.
Terra moving parts
Terra is built using Cosmos, which uses Tendermint’s proof-of-stake delegated consensus mechanism. This makes it possible to scale up to thousands of transactions per second along with near-instant finality at much cheaper rates compared to Etheruem. Cosmos is being used by other major projects like Binance Chain, Crypto.com, and Cosmos Hub.
Currently, Terra has 139 validators, with a total of 341 million LUNA wagered, according to Terra Analytics.
An important detail about the Terra blockchain is that it uses a dual token system, involving Terra (LUNA) and TerraUSD (UST). LUNA serves as the protocol’s utility token, while UST is the native stablecoin.
LUNA’s tokenomics ensures the stability of UST and other stablecoins. UST, on the other hand, is an algorithmic stablecoin introduced in September 2020. This means that UST does not require any centralized or collateralized backing, helping you avoid reliance on central entities and other centralization issues.
This is contrary to other asset-linked stablecoins such as the US dollar, as the value of UST against the dollar is maintained by a constant burning of equivalent LUNA tokens. In other words, UST occurs when an equal amount of LUNA is burned.
For example, if the price of UST exceeds $ 1, the algorithm would burn more LUNA to mint UST and return the value to $ 1. Conversely, if the price is less than $ 1, UST would change to LUNA to prop up the price .
Terra is building a solid foothold in the DeFi scene, with its entire ecosystem locked into TerraUSD. Three major decentralized applications (DApp) are already using the stablecoin, including Mirror, Chai, and Anchor.
Mirror is a synthetic asset protocol that replicates global stock markets and allows users to invest even if they do not have regular access to these markets. On the other hand, Chai is like an e-wallet for fast and cheap mobile payments in Korea, but it also plans to expand in other Asian countries, such as Singapore, Thailand, and Taiwan. And finally, Anchor is a savings protocol that provides UST-based fixed income investments for users. Anchor was introduced in March, but has quickly become a popular agricultural production route, ranking third behind Aave and Compound on TVL.
The long-term value behind Terra is based on the utility of LUNA and the blockchain infrastructure. DApps in the Terra ecosystem are designed to increase demand for UST, reducing the supply of LUNA and making it more valuable in the long term.
In August 2021, the listing of Wrapped LUNA and TerraUSD on Coinbase Pro was believed to be one of the catalysts for its rally as, in the past, LUNA was only tradable to a number of non-major exchanges.
Another catalyst is the anticipation of the Columbus-5 update, which brought significant modifications to Terra that allowed for greater scalability and greater interoperability between chains. LUNA’s price soared from less than $ 10 in July to roughly $ 41 on October 6, and its market cap is already above the $ 18 billion mark, earning it eleventh place among the top crypto assets, according to Cointelegraph Markets Pro.
September 30th Columbus-5 update It is seen that it will attract a plethora of new projects to Terra, putting more deflationary pressure on the LUNA currencies and advocating a more bullish valuation.
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Before the upgrade, the burned LUNA tokens go to a community pool so they can be reinvested and build more apps. This burnt-out MOON is known as “seigniorage,” which essentially refers to the face value of the newly issued coin minus its production costs. After upgrade, those burned-out LUNA tokens are permanently burned, making LUNA more scarce.
Over the past three months, LUNA has experienced a fairly steady supply flow, although it has declined significantly since February 2021. Up to this point, LUNA’s total circulating supply is below 400 million tokens ($ 17.6 billion currently ), and the total reduced supply is 81 million ($ 3.6 billion). The effects of LUNA’s permanent token burning will gradually be felt in the coming months.
The latest update also improves Terra’s usability as it opens up to cross-chain assets on other Cosmos-integrated blockchains, such as Solana and Polkadot. This was made possible by Terra’s integration with the Cosmos Stargate protocol. In addition to opening up to more DApps in the Cosmos ecosystem, the Wormhole Bridge, which is also part of the Columbus-5 update, is designed to reduce friction from UST moving to Solana, making it easier for tokenized assets to move quickly. through the chains.
Finally, another important revision is the performance increase for betting LUNA, one of the causes of its higher TVL. With all these factors at play, the price of the LUNA token has performed above expectations. This is because of how the value of the LUNA token is related to the growth of the Terra blockchain. As DApps on the Terra blockchain generate more demand for UST, this also reduces the supply of LUNA and makes it more valuable to holders.
However, there are two sides to the coin, and it is even more noteworthy, especially amid the intense race for layer one blockchains. That other side is the scenario in which there is no sustainable demand for Terra and its stablecoins, which would pose problems for LUNA holders in the long term.
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