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Terra is a programmable money for the internet that is easier to spend, and more attractive to hold. Those who are just beginning with LUNA and need to understand the ecosystem would do best starting with an explainer on Terra Money.
It is important to understand how does Terra Work? 1 Terra or UST is the digital currency built on Terra’s blockchain. The price of 1 UST is determined by how many people want it and by how much UST is available. The entire Terra Economy is a water pool with tide. The size of the boom is determined by the total supply of the UST. If more people want UST the tide rises and if less people want UST the tide falls.
The height of the pool determines the value of each UST. If you can do more with UST like buy coffee or invest in stocks, more people will want to buy UST. Thus, driving up its price to bring back the water level to 1 dollar. The pool can be expanded by introducing a new supply UST. But where does new UST come from?
At Terra they have a machine that swaps one dollar worth of LUNA to 1 UST. Investors who predict UST will be more useful in the future can buy and hold LUNA. When the value of UST rises above 1 Dollar, any LUNA holder can swap 1 dollar worth of LUNA for 1 UST, and sell each UST for more than a dollar making a profit. The newly introduced UST expands the pool, bringing its price back to the 1 dollar peg. Now, LUNA is more scarce and therefore more valuable.
During times of Contraction, any UST holder can profit by swapping UST for LUNA, raising the price to 1 UST to 1 USD. As UST becomes more useful in the long run, LUNA holders are rewarded for assuming the risk of short-term price volatility.
So, how exactly does the machine work? When LUNA is swapped for UST a certain percentage is burned, and the rest piles up in the community pool. From the other end, new USTs print. This process is called Seigniorage. As more applications are built using UST, mass demand will have the price to deviate above the 1 dollar peg. Meaning, we need more LUNA Swap for USD to expand supply. Meanwhile LUNA becomes more and more valuable and the community pool accumulates more funds. The funds in the community pool are reinvested to build more and the virtuous cycle of growth continues.
Investors who hold LUNA see its value rise during times of expansion. And, if they choose to stake, earn transaction fees on UST. Even when demand for UST is low, Terra’s algorithm automatically increases so that validators are always rewarded for their steady cash flow of UST. With LUNA you can do so much more than own passive income.
LUNA holders can participate in Terra’s governance process proposing or voting for changes in transaction fees, Seigniorage allocation, tax rate and many more. LUNA not only collateralizes UST but also many more world currencies like Terra KRW and Terra IMF SDR on the Terra Blockchain.
Much like the moon, which stabilizes the earth’s rotation Luna and stakers are essential to Terra’s stability. Terra are focused on creating a truly, open and transparent monetary platform.
