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With the crypto market being notoriously unstable, many projects seek to introduce a solution that will allow users to send and receive coins with a stable value. While Tether and its stablecoin, USDT, have to an extent dominated (and still dominate) this market, there are now a variety of other options available to cryptocurrency users. The blockchain project Terra has come out with one such solution. In this article, we will take a closer look at the LUNA coin, its key use cases, and try to understand whether it can be considered a good investment option.
Terra (LUNA) is a blockchain protocol created to develop stable cryptocurrencies and a transparent financial infrastructure, focused on payments and smart contracts. Its key goal is to replace payment chains that include banks, payment gateways and credit card networks.
One of the main barriers preventing cryptocurrencies from gaining mainstream adoption is their price volatility. In the crypto market a coin can rise or fall by 20% or more in a single day. Terra is trying to resolve this issue by creating crypto tokens with stable prices that are tied to fiat currencies. It uses a price stabilizing algorithm that changes the money supply of an asset to restore its value. This can enable lower fees, increased stability and cross-border exchanges.
The Terra ecosystem includes stablecoins, the Anchor protocol, the Terra network native token (LUNA), and the Mirror protocol. Let’s review each of these aspects in detail.
Terra creates stablecoins pegged to the world’s major fiat currencies. Users can access such stablecoins as TerraUSD (UST) tied to the US dollar, TerraMNT linked to the Mongolian tugrik, TerraKRW (KRT) pegged to the South Korean won, and TerraSDR (SDT) pegged to the IMF SDR. To solve the problem with price fluctuations, the protocol uses an elastic money supply mechanism. If the currency price deviates from its peg, the system normalizes it by decreasing or increasing the money supply. New LUNA coins are minted to stabilize the price of Terra stablecoins.
Anchor is a money market and savings protocol built on the Terra blockchain. Being decentralized, it puts together three financial primitives: payments, investing and savings. It allows Terra stablecoin holders to earn a stable 20% APY. In addition, it provides instant deposits and withdrawals, short-term loans and LUNA margin trading.
LUNA holders can earn staking rewards without locking up LUNA because they can stake or unstake LUNA at any time. To benefit from lending, customers can use staked tokens as collateral. They can also borrow half of their staked LUNA value.
Borrowers must lock up collateral at a ratio of 150–200%, depending on the token. They get TerraUSD in return. Anchor’s first liquid staking derivative is bLUNA, a staked version of LUNA. It enables users to earn staking rewards while maintaining complete control over their coins.
Mirror provides trading of non-digital assets via Mirrored Assets (mAssets), which are issued by the protocol and reflect their exchange prices. In order to mint an mAsset, more than 150% of the real asset’s value must be locked up in Terra stablecoins or mAssets as collateral.
LUNA, the Terra network token, is the underpinning of the Terra ecosystem. Its main goal is to bring blockchain technologies to the masses with a focus on utility rather than trading. LUNA is a stablecoin that uses an algorithm of self-regulation by either minting or burning coins based on the current exchange rate of Terra.
The total LUNA supply is 1 billion tokens, and the network is designed to burn coins if their number exceeds 1 billion. The coins are allocated in the following way: 26% were given to backers through private sales, 20% are held in price stability reserves, 20% were intended for Terra Alliance, 20% were given to employees and project contributors, 10% were reserved for Terraform Labs, and 4% were given for Genesis Liquidity quotation on the exchanges.
LUNA serves as a staking token that secures the whole network. It can be held, traded and used as collateral. To keep LUNA, customers can use either Terra’s own wallet to store assets on their computer, a hardware wallet, or a mobile wallet. LUNA can be bought or traded on several cryptocurrency exchanges including Bitfinex, Binance, OKEx and Upbit.
The LUNA coin is used for various purposes, some of which are listed below.
Staking. The primary LUNA function is to protect the network by locking value through a staking mechanism.
Rewarding. Users who confirm transactions and add blocks to the blockchain get rewards in LUNA.
Governance. Terra is a community-governed protocol. Luna stakeholders have the right to submit proposals to a vote on software upgrades, technical modifications, changes to the fee structure and monetary policy.
Collateralization. LUNA token holders can stake their coins as collateral to confirm transactions, and get rewards according to the amount of LUNA staked.
Terra network stablecoins are not collateralized by themselves. LUNA is used as collateral to support their price stability. To mint stablecoins, miners need to burn the equivalent dollar amount of LUNA. For example, when LUNA is swapped for UST, a certain percentage of LUNA is burned, and the rest piles up in Terra’s Community treasury. At the same time, a new UST is printed.
The community pool accumulates funds, which are reinvested to build more apps that use UST. If the demand for UST is low, then Terra’s algorithm increases fees. In this way the validators are always rewarded with a steady cash flow of UST.
To become a validator and to mine transaction blocks, users need to stake LUNA and be among the top 100 LUNA holders. Those who do not qualify can delegate their staked coins to validators, who can thenapprove transactions on their behalf and generate passive income. Users who stake LUNA get staking rewards that depend on their stake size. These rewards come from three sources:
Gas. Terra uses gas to avoid spamming when executing smart contracts. Validators define the minimum gas price and reject higher price transactions.
Fees. Users are charged with fees that range from 0.1% to 1%, are capped at 1 TerraSDR, and can be paid in any Terra currency.
Seigniorage rewards. Seigniorage pool rewards are available to validators when they vote to exchange LUNA for Terra stablecoins.
Terra was created by a Korean blockchain company Terraform Labs, one of the 15 e-commerce companies in the Terra Alliance, a conglomerate in Korea and Southeast Asia. The cofounders — Daniel Shin, and Do Kwon, who is also CEO of the company — aimed to create a new type of cryptocurrency that could reflect the flexible nature of the digital economy.
Terraform Labs was founded in January 2018, and the history of the Terra protocol began. It has already gone through several important stages, which are listed below.
August 2018. A private sale for the LUNA coin is held, raising $32 million.
April 2019. Terra’s mainnet is officially launched.
September 2020. UST Terra stablecoin printing started.
December 3, 2020. Terra’s Mirror Protocol is launched.
February 2021. Terra Station Mobile is released on Android and iOS platforms, allowing users to manage LUNA from their smartphones.
March 17, 2021. Anchor protocol is released.
March 25, 2021. Terra Bridge, a web interface to transfer assets between Terra, Ethereum and Binance Smart Chain, goes live.
Terra has formed a number of partnerships, which are boosting its mass adoption. Among its partners are CHAI, one of the largest South Korean e-commerce wallets powered by TerraKRW; Voyager Digital, a cryptoasset broker; and Bison Trails, a blockchain infrastructure company. Terra has also partnered with Axelar to bring interoperability to the Terra ecosystem. Terra’s other e-commerce partners are Bugs, a Korean music streaming giant, and Sinsang Market, the largest B2B fashion platform in Korea.
Investors behind Terra include Arrington XRP Capital, Binance Labs, Huobi Capital, HashKey Capital, LuneX Ventures, and Ulysses Capital.
LUNA was first available for purchase in a private token sale. The public sale finished in February 2019 with $0.80 for each coin. On July 26, 2019, the price increased to $1.32, subsequently going into a steady decline that ended with an all-time low of $0.12 in March 2020, giving investors a negative ROI of around -80%. After that, the token regained strength. The price gradually increased until the bull run of January and February, when it skyrocketed, reaching its all-time high of $21.76 on March 21, 2021. At the time of writing, the current price of LUNA was around $18, and it was the 26th biggest coin by market capitalization.
Taking into account the current trend toward digital money adoption, the recent bull run of Terra, the fact that it has become one of the largest stablecoins by market cap and its popularity amid traders, our analysis is that there is a fairly good possibility that Luna value will increase in the coming years.
Let’s look at some price predictions for LUNA in the coming years, thus giving an idea if it’s a good long-term investment.
According to the analysis of Walletinvestor, LUNA is an awesome long-term investment. They predict a long-term increase in the price until April 2026, when it reaches $202.
Digitalcoin expects the price of LUNA to rise to $38.99 within one year. In 2022 its price is projected to be $32.08, and in December 2026 the price is predicted to be $78.
Longforecast projects that LUNA will have a long-term price increase and will cost $44.67 by the end of 2021, followed by growth to $54 in September 2022, falling to $41.51 in January 2023.
Cryptocurrency Price Prediction goes even further. It predicts that the LUNA price will be $331 in December 2022 and $836 by December 2025.
We can see that analysts seem to generally predict LUNA will not crash, expect it to rise in value, and consider it suitable for a long-term investment.
There are some factors that can affect the LUNA price. One of these is the growing team of supporters. According to the Terra Community Console, an on-chain data platform, Terra is gaining popularity with 1,800+ new accounts created daily. This means that more crypto enthusiasts are holding and using LUNA, creating transactions and getting more rewards, all of which is increasing the token market capitalization.
Another factor is the limited LUNA coins supply which obviates inflation — and the coins become scarcer every day. The increasing demand and use of Terra stablecoins through payment applications and savings protocols are also driving the LUNA token value. Moreover, at the time of writing, Terra is ranked third in terms of the number of transactions among all blockchains.
LUNA represents a viable solution for those who seek stability when using cryptocurrencies. Although LUNA is not a stablecoin by itself, it’s essential in maintaining the overall stability of the protocol. The growing ecosystem of the project is adding to its popularity, with future price predictions looking optimistic.
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