Terra aims to build a global payment network backed by a price-stable currency and propelled by its blockchain payment solution, with the goal of becoming a more affordable and efficient alternative to e-commerce payment rails. Founded in 2018 by Do Kwon and Daniel Shin, its creation was backed by The Terra Alliance, a group of large ecommerce companies that bootstrapped the payment network and supports the adoption of Terra.
By leveraging the power of blockchain to deliver fast, secure and trusted settlement Terra offers merchants significantly lower transaction fees along with programmable payments and payment infrastructure. At the moment the protocol supports 4 stablecoins (including representations of the USD and the KRW). However, the protocol’s core asset is LUNA, a protocol token that powers stability for the currencies on Terra through seigniorage, secures the Terra blockchain as the native protocol staking asset and enables network participants to exercise governance rights.
A primary adoption driver of the Terra network is its blockchain payment solution, CHAI, a successful mobile payments DApp that utilizes stablecoins on the Terra protocol that enables a seamless payment experience with low transaction fees and built-in ecommerce discounts for users.
The Terra ecosystem also includes ANCHOR and Mirror. Anchor is a money market and savings protocol on the Terra blockchain that enables depositors to earn a low-volatility benchmark interest rate via staking proof of stake asset collateral, called bAssets, allowing for the borrowing and exchange of assets on the Terra network. Mirror is a protocol for synthetic derivatives that launched recently with US equities first.
The Mirror protocol is designed to be fully decentralized, with all code changes and on-chain treasury governance conducted by holders of MIR, the protocol’s governance token.
Those who stake LUNA on the Terra protocol now receive dual incentives for participating in the form of both LUNA and MIR. The MIR tokens will be distributed every 100,000 blocks (weekly) according to the amount of total LUNA staked.
Terra utilizes seigniorage as its “fiscal policy lever”, funding various activities in the network via its community treasury. Seigniorage is created by Terra’s minting operations as a stimulus for transactions and further serves to facilitate adoption of the network. A portion of this seigniorage goes to the Terra treasury to fund fiscal stimulus via allocating resources to DApps—such as by offering consumer discounts on Terra’s payment DApp CHAI—thus spurring further adoption of the payment system within the consumer market. Another portion of the seigniorage LUNA is sent to node operators as a reward for participating in the network.
Terra rewards validators that secure the network with a share of all the value settled on the network (a transaction fee known as the tax rate). The fee is variable and adjusts according to varying system states, in order to optimize for participation and stability. This is Terra’s “monetary policy lever”. Both core policy levers on Terra are fully programmatic.
Terra operates with a delegated proof of stake consensus algorithm and is a Tendermint-based Layer 1 protocol, built using Cosmos-SDK. Validators must run full nodes in order to participate in the network. There is no required minimum for self-bonding to one’s node, however, the total amount of delegation to a node plus the amount of self-bond determines one’s probability of producing blocks.
The active set of validators are the top 100 validators with the highest total stake (self-bonded + delegators’). Validators may also exercise governance rights over the Terra treasury to help determine how the resources gained from seigniorage will be allocated to DApps within the Terra ecosystem.
LUNA enables the proof of stake mechanism within Terra. Validators must have LUNA staked in order to validate blocks and access transaction fees as a reward for their work. These transaction fees are known within Terra as the Tax Rate, and range from 0.1%-1% for all Terra transactions.
Within each block period the Terra protocol elects a block producer from the active set of validators, who then completes the work of creating the next block by aggregating votes and achieving consensus. The validator then receives a block reward for doing so. In addition to the Tax Rate and block rewards, validators are rewarded via stablecoin swap fees, seigniorage burns, and price oracle rewards.
LUNA is also the lever through which the stablecoins on Terra maintain stability. In an excess demand condition, wherein the value of a Terra stablecoin rises above that of its pegged currency, the system mints the stablecoin and burns an equivalent amount of LUNA.
Conversely, when a stablecoin within Terra is experiencing a lot of selling pressure, the system mints and sells more LUNA in order to buy back and burn Terra—contracting the money supply and diluting LUNA holders.
Stablecoin mechanisms are at the heart of the protocol, as Terra’s goal of becoming a global financial payment network is driven by its use of stablecoins pegged to fiat currencies worldwide, with the network maintaining the steadiness of value needed to enable use for ecommerce.
The protocol uses a decentralized price oracle to estimate the true exchange rate of the stablecoins on the network. Miners submit a vote for what they believe the current exchange rate is between the Terra stablecoins and the fiat currencies they are pegged to, the weighted median of the votes is set as the true rate, and LUNA is awarded to those validators who voted within 1 standard deviation of the true rate. Those who voted for an exchange rate outside of the standard deviation may be slashed.
The price oracle also functions to support the adding or deprecating of currencies within Terra; when oracle votes for a particular currency cross a submission threshold the protocol may start supporting that currency, while a lack of oracle votes over the course of a specified amount of time may lead to the currency being deprecated.
|Initial Token Supply||600M LUNA|
|Maximum Token Supply||1B LUNA|
|Active Set of Validators||Top 100 validators by self-bonded stake and delegation. This may increase to 300 in the future.|
|Expected Reward Rate||Variable, currently 9.84%|
|Unbonding Period||21 days, no rewards earned during unbonding.|
|Delegation Fee||0.001639 LUNA|
|Reward Compounding||Rewards accrue in a pool and need to be withdrawn and re-staked to compound.|
|Reward Payout Frequency||Rewards accrue per block and are paid out when called.|
|Passive Distribution||Validators and delegators will have to manually collect their rewards by submitting withdrawal transactions. Each validator has the opportunity to charge commission to the delegators on the rewards collected on behalf of the delegators.|
|Redelegation||Delegators can change their validator without having to unbond. A maximum of 7 redelegations per account can take place at a time. Each redelegation happens instantly, but the same stake can only be redelegated again after one unbonding period.|
The inflation of LUNA has two aspects: programmatic inflation as block rewards from the protocol, and inflation due to LUNA minting related to seigniorage.
The programmatic inflation of LUNA is a function of the transaction volume within Terra and the rate of value capture as expressed by transaction fees per LUNA staked. The module is optional, meaning that governance can introduce programmatic inflation if the community votes to do so, but was set to 0 at genesis and currently remains at 0.
The minting conducted to regulate the Terra stablecoin supply is what generates the inflation related to seigniorage. Given the early stage the network is currently in, and the fact that merchants on the network are still net sellers of Terra stablecoins (i.e. they currently use Terra stablecoins as a medium of exchange, but not a store of value) seigniorage related inflation has contributed to a significant increase in the supply of LUNA.
Terra functions with a delegated proof of stake model, and, as having delegators stake their LUNA to one’s validator increases the validator’s total stake, delegation increases the likelihood of being selected to perform block validation and to earn block rewards.
Validators can optimize their rewards by both self-bonding a higher portion of LUNA, thus showing delegators that the validator has more personal risk at stake in their operation of the node, and also by choosing an attractive commission rate, or the commission applied on rewards by validators before it is distributed to their delegators.
Validators within the Terra protocol are at risk of loss due to slashing as a result of poor behavior, and other validators can submit evidence of a slashable offense. There are three primary slashing conditions:
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