Terra was created in January 2018 with the singular vision of facilitating the mass adoption of cryptocurrencies by creating digitally native assets that are price-stable against the world’s major fiat currencies. Keeping in mind that previous innovations in the technology of money was bootstrapped by large payment networks (Alipay with Taobao, Paypal with eBay, Visa with banks), Terra was born with the support of the Terra Alliance, 15 large e-commerce companies in Asia that collectively process 25 billion USD in annualized transaction volume and 45 million users. The vision of the project is that with the adoption and user engagement of a massive payment network, it will be able to, for the first time, bootstrap a blockchain payment network to the scale it deserves and facilitate far more powerful products and use cases through its infrastructure.
During conversations between co-founders, Daniel Shin and Do Kwon, the concept of Terra began as a solution towards immediate and massive usage of the cryptocurrency and blockchain infrastructure being built around them. To them, price stability and adoption were important in preparing the first steps towards massive adoption of cryptocurrency and blockchain infrastructure. Daniel Shin, with his extensive experience in building one of the biggest e-commerce platforms in Asia, laid out the existing problems we face in payment networks that cannot be solved through just incremental improvements. Do Kwon, previously a founder of a wireless mesh network startup building decentralized application, explained how Terra can turn those problems into an opportunity to build money from the ground up.
One part of Terra’s value contributions, payments, in essence replaces the complicated payments value chain, including credit card networks, banks, and payment gateways with a single blockchain layer. Through this, it can offer merchants a significantly cheaper transaction fee, saving them money that can be reinvested in something else. Further, in concert with the efficiencies that Terra has provided payment channels for both merchants and consumers, it continues to steadily provide infrastructural improvements and tools for the foundations of laying down a credibly neutral, distributed, and radically transparent ecosystem. Bolstered through the initial mass adoption of Terra’s blockchain infrastructure powering its partner, CHAI, which has amassed over 1.3 million users to date, Terra moves naturally towards ecosystem building that offers competitive programmable payments, logistics, and infrastructure to power the plethora of industry that will be built on efficiency and scale.
Tokens in Terra’s ecosystem are represented by two token types: a family of Terra stablecoins and Luna.
LUNA represents the mining power of the network of Terra stablecoins. The Terra Protocol runs on a delegated Proof of Stake (PoS) blockchain, where miners need to stake a native cryptocurrency Luna to mine Terra transactions.
The family of Terra stablecoins are each pegged to the world’s major currencies. The protocol issues Terra currencies pegged to USD, EUR, CNY, JPY, GBP, KRW, and the IMF SDR over time. More currencies will be added to the list by user voting.
Terra Core is based on Tendermint, which relies on a set of validators that are responsible for committing new blocks in the blockchain. These validators participate in the consensus protocol by broadcasting votes which contain cryptographic signatures signed by each validator’s private key.
Validator candidates can bond their own Luna and have Luna “delegated”, or staked, to them by token holders. The Columbus Mainnet will have 100 validators, but over time this will increase to 300 validators according to a predefined schedule. The validators are determined by who has the most stake delegated to them — the top 100 validator candidates with the most stake will become Terra validators.
Validators and their delegators will earn the following fees: *
Compute fees: To prevent spamming, validators may set minimum gas fees for transactions to be included in their mempool. At the end of every block, the compute fees are disbursed to the participating validators pro-rata to stake.
Stability fees: To stabilize the value of Luna, the protocol charges a small percentage transaction fee ranging from 0.1% to 1% on every Terra transaction, capped at 1 TerraSDR. This is paid in any Terra currency, and is disbursed pro-rata to stake at the end of every block in TerraSDR.
Seigniorage rewards: Validators that participate in the Exchange Rate Oracle get a portion of seigniorage if they faithfully report and win the ballot (vote within the reward band around the weighted median).
Besides revenue, there are scarcity incentives:*
Swap fees: A small spread is charged on atomic swap transactions between Luna and any Terra currency, which is burned and creates scarcity in Luna and indirectly rewards validators. Note that validators can set commission on the fees their delegators receive as additional incentive.
If validators double sign, are frequently offline or do not participate in governance, their staked Luna (including Luna of users that delegated to them) can be slashed. The penalty depends on the severity of the violation.
Terra is a distributed ledger of account balances maintained by validators. These validators follow the Tendermint DPoS algorithm and vote on blocks. The Luna token is the native staking asset recognized by the Terra protocol and represents mining power, granting its staking validator access to transaction fees and miner rewards, allowing them to benefit from increased user adoption and growth within the Terra ecosystem.
Terra Core is a golang implementation of the Terra Protocol and built using the Cosmos SDK, which provides a robust framework for constructing blockchains that run atop the Tendermint Consensus Protocol.
The Terra network provides an ecosystem of stablecoins (a family of stablecoins pegged to a growing list of fiat currencies) and a mining token, Luna, which serves as a governance mechanism, volatility absorption tool, and rewards capture through transaction volume and seigniorage.
Terra stablecoins achieve stability through consistent mining rewards with a contracting and expanding money supply. If the system has detected that the price of a Terra currency has deviated from its peg, it must apply pressures to normalize the price. Like any other market, the Terra money market follows the simple rules of supply and demand for a pegged currency.
Terra miners play a foundational role in the security and stability of Terra. They provide the former by participating in PoS consensus. They provide the latter by absorbing short-term volatility in Terra demand. Stable demand for mining is a core requirement for both security and stability. To achieve this, the protocol aims to offer stable and predictable rewards in all economic conditions, booms and busts alike. Rewards are seen via transaction fees and seigniorage (Luna burn).
The network emphasizes decentralized allocation of resources from its fiscal policy to support the development, continued growth, and steady income for decentralization applications (dApps) building on Terra. To receive this seigniorage from the Treasury, a dApp needs to register for consideration as an entity that operates on the Terra network. dApps are eligible for funding depending on their economic activity and use of funding. There are regular voting intervals where Luna validators vote to accept or reject new dApp applications for Treasury accounts.