The Terra (LUNA) cryptocurrency was launched in 2019, but it turned out to be on everyone’s lips in late 2021 and early 2022. In just a year, the altcoin’s value has increased by more than 5500%. Thus, in January 2021, LUNA cost about $1.5 and had risen in price to $85 by January 2022. In April 2022, the altcoin exchange rate reached its all-time high of $116. Still, in just a couple of months, the coin collapsed — at the time of writing this article, LUNA was worth about $0.0001387.
Today, we decided to figure out how LUNA works, what is the reason for its popularity lately, and what led to its recent collapse. What is LUNA cryptocurrency? Let’s try to find out!
What Is Terra (LUNA) Crypto: Key Things to Know
LUNA was invented by the South Korean company Terraform Labs. The company was founded in 2018 by entrepreneurs Daniel Shin and Do Kwon. Shin previously worked on the Ticket Monster project, a South Korean online ticket booking service estimated at $1.7 billion.
What is LUNA crypto? LUNA is a native token of the Terra blockchain, which is based on an algorithmic stablecoin. The creators conceived Terra not just as another blockchain but as a full-fledged financial and technological system with an eye on business.
Back in 2018, TechCrunch described the project as ‘AliPay on the blockchain.’ Chinese AliPay is one of the largest payment systems in the world, part of the Alibaba Group. Terrafrom Labs said that Terra should become another way for companies to make payments along with the usual Visa, Mastercard, and others.
The creators of Terra chose stablecoins for a reason. Cryptocurrencies are known for their volatility and therefore are not suitable for paying for goods and services. Stablecoins, on the other hand, are pegged to fiat currency, which means that their exchange rate is more stable. True, some believe that algorithmic stablecoins are much more volatile than ordinary ones.
To develop the project, the company enlisted the support of several dozen companies that formed the Terra Alliance. Members of the alliance must promote the use of Terra through their services.
Last December, Terra became the second-largest smart contract platform after Ethereum.
How Does LUNA Cryptocurrency Work?
It is important to clearly distinguish between the Terra stablecoin and the LUNA cryptocurrency.
What is LUNA crypto? Well, LUNA, among other things, is necessary to maintain a ‘balance’ in the Terra blockchain. To be more precise, LUNA cryptocurrency maintains the price of Terra stablecoins at the required level.
There are several stablecoins on the blockchain, pegged to several currencies: the euro, the dollar, the Japanese yen, and even the Mongolian tugrik. Depending on the currency to which the stablecoin is pegged, it can be called TerraUSD, TerraEUR, and so on.
It works like this: when the volume of transactions among all participants in the Terra network grows, the demand for Terra stablecoins increases. In this case, the blockchain issues new LUNA coins to stabilize the stablecoins.
Accordingly, in the opposite situation — when the volume of transactions falls, Terra withdraws the LUNA excess back and burns it.
The emission of LUNA is dynamically limited to one billion coins. That is, if this amount is exceeded at some point, the excess will burn out automatically.
By the way, Terra and LUNA have such names for a reason. As conceived by the developers, they symbolize the relationship between the Earth and the Moon, which provides gravitational stability.
How to Use LUNA: Key Ways to Know
What is LUNA cryptocurrency? Well, LUNA is necessary not only to maintain the balance of the entire Terra system but also to make purchases on the blockchain. To buy something, a user needs to purchase the Terra stablecoin. To do this, you will need to burn a certain amount of Luna coins, get your stablecoin for it, and then pay for the purchase in one of the apps running on the blockchain.
Since the Terra blockchain runs on the Proof-of-Stake algorithm, LUNA crypto holders can use coins for staking. The network uses these coins to confirm transactions.
Through staking, investors also receive rewards and can take part in decisions regarding the Terra ecosystem via voting.
You can use the Terra Station wallet for staking, which allows accessing decentralized apps that run on the Terra blockchain.
Why Did Terra (LUNA) Crypto Drop in Price?
On Monday, May 9, the algorithmic stablecoin of the Terra ecosystem, TerraUSD (UST), lost its peg to the US dollar (the most important characteristic for any stablecoin). The LUNA cryptocurrency used to issue it has collapsed by more than 95% and is still in free fall.
LUNA became the first coin in history to enter the top 10 cryptocurrencies and then depreciate by 95%. Investors are actively withdrawing funds from Terra blockchain due to the collapse of the main ecosystem model.
Terra called its goal the creation of a bridge between traditional finance and cryptocurrencies. To do this, the project has launched several stablecoins, including USD-pegged UST. The algorithm of interaction between UST and LUNA, the internal coin of the system with a floating rate, is responsible for the 1:1 rate compliance. Because of this, UST is called an algorithmic, or decentralized, stablecoin.
Do Kwon, one of the currency’s creators, has updated a plan to keep the UST peg alive, allowing more LUNA tokens to be created so that the market can absorb all the UST that comes out. But there will be a ‘high cost’ to pay for this, he stated on May 11.
Theoretically, the price of LUNA cryptocurrency will fall even more as an increase in supply will dilute the value of individual tokens.
It is almost impossible to give an accurate forecast, especially a long-term one, given the volatility of the crypto market.
The Wallet Investor publication has an extremely optimistic prediction of the future of this cryptocurrency. Thus, according to the forecasters, LUNA crypto will cost about $151 in a year.
DigitalCoinPrice offers a more cautious forecast. They suggest that the maximum altcoin rate in 2022 will be $0.00004, in 2023 — $0.000045, and in 2024 — $0.0000462.
Have you invested in LUNA crypto? Feel free to share your experience in the comments below!