Terra is an algorithmically-governed, seigniorage share style stablecoin blockchain platform to which a collection of fiat-pegged tokens and a stabilizing cryptoasset, Luna, are native. Borrowing from and building upon earlier seigniorage-based stablecoin projects—namely, Basis and Carbon—Terra introduces a novel stabilization protocol built on a public Delegated Proof-of-Stake blockchain. Like the aforementioned projects, Terra utilizes an auxiliary asset to ‘absorb’ the volatility of its stablecoins, using it to expand and contract the stablecoin supply and incentivize arbitrage, thus theoretically maintaining the latter tokens’ fiat pegs. Unlike Basis’ Bond and Shares Tokens, or Carbon’s Credits, Terra’s Luna is central not only to stabilization procedures, but consensus procedures as well.
In Terra’s Tendermint-based, pBFT, DPoS protocol, participants stake Luna—their own and that delegated to them— in order to create and validate new blocks. The top 100 users by stake size are selected as validators: nodes verifying and adding proposed transactions to Terra’s blockchain. Again borrowing from its predecessors, Terra utilizes its own decentralized oracle reporting system to monitor exchange rates and make necessary adjustments to fiat pegs. Terra’s stakers must also serve as the network’s oracles, using a Schelling point-esque voting system. Stakers who report within one standard deviation of the weighted median—the price considered by the network to be accurate—receive rewards denominated in Terra, and those reporting outside of this range have their stakes slashed.
In each block period, a single block producer is algorithmically-selected from the pool of Luna validators, with the overall percentage of block producing opportunities received by a candidate being equal to the percentage of overall staked Luna comprised by their stake. Luna delegation is non-custodial, and 90% of block rewards are offered to those delegating Luna to the elected block producer. All validator nodes, including the current block producer, receive pro rata block rewards, paid in Luna, and transaction fees, paid in Terra. Though the intertwining of the stabilization and staking/consensus mechanisms enhances the liquidity and utility of Luna, such a marriage imposes upon stakers the consequences of heightened asset volatility, as discussed later in this section.
The procedures Luna uses to stabilize Terra tokens’ price are at the core of Terra’s monetary policy. While the specific list of Terra’s multiple stablecoins is detailed in the following section, for the purpose of simplicity, stablecoins will be referred to interchangeably in this section as “Terra.” At a high level, Terra’s price stabilization is achieved through artificially-incentivized arbitrage and the minting and burning of tokens during expansion and contraction periods, respectively. Arbitrage, a practice necessary to correct inefficiencies in traditional markets, is incentivized through the protocol’s maintenance of consistent Terra/Luna exchange rates irrespective of market conditions. That is, when the price of Terra falls below its fiat peg, the protocol allows users to purchase one Terra worth of newly minted Luna—with Terra, at a fixed rate—and realize a profit equal to the difference between the market value of the Terra and that of the newly minted Luna. As a result of such potential profits, demand for Terra increases, moving it closer to its fiat peg. At the same time, repurchased Terra is burned, contracting its overall supply. The combined result of these actions is the shifting of Terra’s equilibrium price, ideally to the point at which it matches its fiat peg. Conversely, when the price of Terra surpasses its fiat peg, a reciprocal procedure is enacted: newly-minted Terra is exchanged for Luna at a rate preferable to that of the market, increasing supply and decreasing demand for Terra, respectively.
Like Terra, Luna’s issuance is fueled by minting, and its repurchase is followed by burning. However, because manipulation of both assets is driven solely by reactions to Terra’s price, price volatility from Terra is essentially conserved and transferred to Luna. As a result, validators, whose ability to earn rewards relies on the price and availability of Luna, experience the immediate consequences of Luna’s volatility. To compensate for such price fluctuations, the protocol attempts to provide consistent staking rewards by altering Luna burn rates and transaction fees according to market conditions. When the value of Luna, and thus value of staking rewards, is increasing, transaction fees are decreased and repurchased Luna is burned at a lower rater. Alternatively, when the price of Luna is decreasing, transaction fees are raised and Luna is burned at a higher rate. As such, a predicament arises from a novel and relatively untested seigniorage/DPoS hybrid protocol, the efficacy of these tactics relieving, and ultimately retaining to the network, stakers remains to be seen.
Terra’s auxiliary projects include a partnership CHAI, a wallet provider and mobile payment service, and the Terra Alliance, an ecosystem for merchants transacting in Terra. Further, Terra provides a dApp platform on which independent developers may build financial applications that use Terra as their underlying currency. Such dApps are eligible for funding from Terra’s treasury, which is funded by a small portion of block rewards. After a project registers for eligibility, Luna validators vote on which dApps to funds; those receiving more than two thirds affirmative votes will be financed in proportion to the number of votes in their favor, receiving a sum which may not necessarily match requested amount of capital. Conversely, validators may also “blacklist” a dApp, permanently revoking eligibility for Treasury funding, by a two-thirds vote.
Terra’s mainnet, “Columbus,” launched in April of 2019, one year after the project’s founding. Terraform Labs is based in South Korea and led by Daniel Shin, Wharton graduate, former McKinsey & Co. analyst and founder of TicketMonster, one of South Korea’s leading e-commerce platforms. Do Kwon, the project’s other cofounder, is a form Microsoft and Apple engineer and holds a computer science degree from Stanford. Terra’s notable financial backers include Polychain Capital, Kenetic Capital, Arrington XRP and Binance Labs.
Terra currently has four freely-tradeable tokens in its network. The Luna token confers staking rights and is used in the protocol’s stability mechanism. Additionally, there currently exist four stablecoins currently on the Terra network: TerraUSD (UST), pegged to the U.S. dollar; TerraKRW (KRT), pegged to the South Korean won; TerraMNT, pegged to the Mongolian tugrik; and TerraSDR (SDT), pegged to the IMF’s SDR unit of account. TerraSDR is considered the project’s flagship currency, as the SDR is considered the most price-stable ‘currency’ in existence. Each stablecoin’s total circulating supply is elastic and a function of demand; that is, when increases in demand cause prices to rise, more tokens are minted to lower prices, increasing total token supply—and vice versa. Likewise, the total circulating supply of Luna is also a function of demand for the network’s stablecoins. Planned additions to Terra’s stablecoin roster include euro-, yuan-, and yen-pegged tokens. Terra stakers have the ability, by vote, to recommend new Terra currencies and deprecate existing Terra currencies.
An initial supply of one billion Luna tokens were distributed in the following manner: 40% to Terra Alliance members, 20% to the project’s treasury, 20% to team members and 20% in a token sale. Terra held a private token sale of Luna and an equity fundraising event in March of 2019, which collectively raised $32 million. Terraform Labs announced Program Robinluna, in which it will distribute Luna it has earned from its own stake to the community, in June of 2019.