The world has seen many revolutionary ages in payment systems. In ancient times, the barter system was followed by the people. After a few decades coins were issued and became a medium to purchase goods. After sometimes fiat currency in the form of notes evolved and commercialization took place on a large scale through it. Today, in the time of digital payment systems, the global economy is scaling at a tremendous speed. Many payment industries are reliant, built on outdated technological infrastructure, and confined to certain areas only.
The next-generation blockchain Terra has built a strong payment networking system for the growing business model that seeks interoperability. Terra aims to improvise efficiency for payment service providers and increase the efficacy of the customers. Terra is working with 15 e-commerce partners who account for $25 million in Gross Merchandise Value (GMV. Currently, Terra holds a strong customer base of more than 45 million.
Let us learn more about Terra Network and hows it functions in the blockchain industry.
What is Terra Network?
Terra produces algorithmic stablecoins on its open-source blockchain. These stable coins are pegged against traditional fiat currency so that the value is stable in the market. Terra’s ecosystem was developed by a startup called ‘Terraform Labs’ in 2018 by Do Kwon and Daniel Shin. Kwon is a former Microsoft employee based out of South Korea. Currently, Daniel Shin is working as the Founder and CEO of Chai Corporation. Where Chai is built on Terra and is a decentralized payment application popular among Koreans. The citizens use the payment service to purchase day-to-day useful items, book cinema tickets, cabs, and other resources using the Terra stablecoin KRT.
Today there are as many as 2 million users in Korea spending 1 billion of Terra KRT on their chores and making the circulation of the stablecoin easy in the industry. Also in Mongolia, about 40,000 users use Terra MNT to buy goods. Similarly, a large number of the population uses Terra stablecoins in their country to purchase goods and services.
According to Terra’s Whitepaper, the cryptocurrency Terra is a price-stable and growth implementing currency in the market. The Terra relies on a staking coin LUNA for its utility and performance in the network. Through stablecoins, the Terra ecosystem has successfully managed to provide low fees transactions, cross-border settlements, and instant settlements to its customer. The stablecoin also brings forth several combined features of both fiat currencies and Bitcoin (BTC) in the market.
Built on Cosmos Blockchain Technology, Terra is designed to manage the fragmented payment infrastructure of the various service providers. The payment service providers use Terra as a solution to maintain price stability. And for this Terra charges significantly discounted fees ranging from 0.5% to 2%, way below the industry norms.
How does Terra-LUNA function?
Under Terra Protocol, the system is designed to maintain equilibrium among all the stablecoins through specialized algorithmic technology. The stablecoin usage data is accumulated directly from the Terra Blockchain to balance the prices onboards. The pivot role here is played by a rebalancing staking coin called LUNA.
Currently, Terra has many running stable coins pegged on different countries’ fiat currencies. For example, TerraUST is pegged on US Dollar, Terra KRT is pegged on Korean Won, Terra MNT is pegged on Mongolian Tugrik, and many more in different parts of the world. Through differently pegged stablecoins in many countries, anybody can easily send Terra UST from America to Korea or Mongolia in the converted form of Terra KRT or Terra MNT respectively. Therefore achieving better cross-border functionalities.
To meet the large demand and supply, Terra algorithmically issues new LUNA coins to maintain the price stability among the stablecoins of the overall network. On the other hand, when the demand decreases on the Terra crypto network, the system automatically limits the circulation of LUNA or burns it when in excess supply.
The price of UST depends upon the demand and how much UST is available. Terraform Labs has designed a specialized mechanism where LUNA is converted into UST to meet the demand in the market. Whenever the price of UST increase from $1, LUNA comes into action and gets converted into UST to match the market price. While LUNA becomes scarce in this process, it becomes more valuable for the investors to invest in.
Therefore, whenever a new UST is made through the mechanism, a certain amount of LUNA is burned and some amount of LUNA gets piled up in the governing account or treasury. This process is known as Seigniorage. In a similar pattern, in every country, the Terra stablecoins run in the market in exchange for LUNA priced differently as per the country’s fiat currency.
How does the Terra blockchain work?
Terra uses Delegated Proof-of-Stake (DPoS) consensus method known as ‘Tendermint’, to cycle the block-adding process. Certain individuals or groups of individuals act as ‘validators’ who are responsible for proposing a new block.
Validators play a major role in running the Terra network using a program known as a full node. They are the miners of Terra Blockchain and are responsible for securing the blockchain and maintaining adequate accuracy. The full node program validates the transactions and blocks of the blockchain. The validators play a key role in stabilizing the prices of Terra stablecoins around the world through the process of arbitrage.
According to the DPoS mechanism, a validator must stake a delegated number of coins including their coins also, making the pool bigger. The bigger the pool is, there are higher the chances of adding a new block for that validator in the blockchain. Consequently, the validator earns in exchange for staking rewards and more gas fees during the transaction.
A validator is chosen as a proposer to submit a block of transactions. Other validators in the network vote to either accept or reject the proposed block. If the block is rejected through voting power, a new proposer is selected randomly and the whole process starts again. If the block is accepted, it is added to the chain resulting in the distribution of transaction fees as staking rewards to the validators and delegators.
And therefore, the process repeats itself to generate new blocks in the chain. There cannot be a false block generation as each validator keeps a record of all the verified transactions. Thus, each validator makes sure to protect the integrity of Terra Blockchain through their voting consensus mechanism.
Currently, there are 98 projects in the development phase on Terra Blockchain. The Terra ecosystem is emerging as the first choice of developers to build real estate platforms, games, payment featured dApps, yield farms, and so many more things. It is becoming a user-friendly platform for electronic cash and payment services, especially in countries where bank credit and debit card transaction fees are high. With many protocol beings developed by Terra like Anchor, Chai, and Mirror, it is gaining traction and trust in the decentralized finance (DeFi) community.
However, many users are participating to become validators on the platform which is fueling the growth of UST and LUNA as well. Certainly, there are other top rival stablecoins in the market, but UST will always going to match the demand and supply chain as it burns and mints LUNA simultaneously to mitigate the volatility.
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