Updated: Dec 20, 2019
Luna (LUNA) is the price volatility absorbing secondary token that is used on the Terra blockchain. The primary token on the blockchain is Terra, which is aiming to become the go-to decentralized stable coin for everyday purchases across the globe. While Terra is referred to as the price-stable cryptocurrency for mass adoption, LUNA serves as its collateral. It is important to note that the LUNA of Terra Money and LUNA Coin are two different cryptocurrencies and are not interchangeable.
This short guide will explain what LUNA is designed for, the team behind it, the way it works, and the various uses and applications.
What Is Luna Designed For?
As mentioned earlier, the Terra project utilizes two tokens – Luna and Terra. The team behind the project wanted people and investors to be able to trust crypto assets. For this purpose, they designed a stable coin in the form of Terra, which has its value pegged to multiple major fiat currencies, like KRW, CNY, USD, and GBP.
Terra is also pegged to the value of the International Monetary Fund’s Special Drawing Rights (IMF SDR), which is an international reserve asset based on the combined value of the U.S. dollar, the British pound sterling, the euro, the Japanese yen, and the Chinese renminbi.
Luna was designed to act as the collateral to the stable coin. It attempts at providing security and stability to this price-stable cryptocurrency and the Terra Money network as a whole. Luna is also designed to be a utility token acting as the mode of payments on the Terra platform. This is expected to strengthen the position of LUNA on the Terra platform, as the team is hoping to evolve the platform into new financial infrastructure to accommodate the next generation of Dapps.
Who Is The Team Behind Luna?
Terraform Labs is the team behind the project. This is a Seoul-based company that was co-founded by Do Kwon and Daniel Shin. Kwon has noteworthy experience as a software engineer at Apple and Microsoft. He has also helped co-found the startup Anyfi. Shin has an ambitious career profile as well. He founded multiple companies before setting up Terra, including TicketMonster, Fast Five, and FoodFly.
The cumulative experience and industry recognition of the founders has allowed Terra to enter into strategic partnerships with over 20 platforms across Asia, including industry giants such as Woowa Brothers (food delivery, South Korea), TicketMonster (eCommerce, South Korea), Carousell (eCommerce, Singapore), and Tiki (eCommerce, Vietnam). These alliances are mainly for the partners to incorporate Terra's stable coin as a payment method in their businesses.
How Does Luna Work?
Terra’s mainnet was launched in April 2019 and is developed on Tendermint’s proof-of-stake (PoS) consensus mechanism. There are over a hundred validators, who have staked their Luna tokens as an attempt to secure and process transactions on the Terra blockchain network. A validator’s probability of becoming a block producer is directly correlated with their Luna stake size.
The Terra blockchain works by incentivizing and compensating validators through seigniorage, which is the profit that comes from minting currency and transaction fees. A small fee is paid to all validators to keep them motivated and to keep the platform running as it should. The default fee is 0.1%, which is capped at 1%.
The protocol is designed to expand its supply whenever the price of Terra goes above the target price. Conversely, the protocol shall contract the supply of LUNA when the price falls below the intended price. LUNA is used as a market maker for Terra token. Purchasing 1 Terra compels the protocol to mint and sell 1SDR worth of LUNA. The platform maintains stability by essentially using LUNA as the market maker and by maintaining both sides of the contract.
What Are Current and Future Applications of Luna?
LUNA is designed to be a utility token. It is primarily used to incentivize and compensate validators through seigniorage and transaction fee. The crypto token is also used as the staking currency on the Terra platform. Another important use of LUNA is to stabilize the price of the primary token Terra.
LUNA also represents mining power on the Terra platform. The crypto is staked and acquired by miners to participate in Terra’s consensus mechanism and secure the platform.
The future of LUNA appears to be bright since Terra Money is focused on the mass adoption of the platform. Binance Labs, OKEx, Huobi Capital, Dunamu (which owns Upbit), and other large crypto exchanges have already invested $32 million in the crypto. Upbit) - led a $32 million investment in Terra. Polychain Capital, China’s FBG Capital, Hashed, 1kx, and Kenetic Capital are some other noteworthy investors.