What is the currency of Luna? What is Terra?

Luna is the underlying token for the Terra blockchain, a platform developed in South Korea to secure digital payments globally using cryptocurrencies. To achieve this, Terra aims to build Stable Coins against fiat currencies, but without a corresponding balance of fiat currencies.

 Tera-Luna has established several stablecoins and is maintaining their stability through an algorithm that adjusts the price of the stablecoin. It is possible to convert between these currencies and the network currency Luna directly. Unlike other stablecoins, terra stablecoins do not have reserves, for example BUSD keeps reserves in US dollars. DAI is backed by other cryptocurrencies, while the most popular stablecoin TerraUSD (UST, corresponding to the US dollar), has no reserves and leaves the task of maintaining its stability to an algorithm based on the Luna coin.

 The mission of the network currency Luna is to reduce the volatility of the stablecoins so that the value of the UST is equal to one dollar in addition to that the miners keep it to check and confirm transactions on the network and get rewards, it depends on the Proof of Stake protocol. Transaction fees or the so-called gas are paid in luna currency.

 It is noteworthy that the maximum number of luna symbols is only 1 billion. If the network exceeds this number, Terra will burn the Luna Coins until they return to the equilibrium level.

What is the currency of Luna? What is Terra?

Tera toggles directly between its stablecoins and Luna. For example, if we want to get 100 UST and the value of a luna coin is 50 dollars, the network will burn 2 luna coins to get 100 of UST. If we want to get 1 Luna, Terra burns 50 UST tokens, and this process helps stabilize the prices of its stablecoins. Here is an example showing how the Terra algorithm works to keep its stablecoins stable:

 If the price of one UST drops to $0.98, which is 2 cents less than the desired value. In all transfers between UST and LUNA, one UST equals $1. When the dealers see this price difference they find an opportunity to make some profits. If they buy 100 UST for $98, then convert it to a Luna tag, they earn $2.

 But how does this end up with the price stability at $1? Increasing the purchase of UST increases its price due to a decrease in supply and an increase in demand. When exchanging it with Luna, Tera burns it and the supply decreases, and this leads to an increase in its price until it reaches $1, then its purchase will not bring any additional profits and purchases will decrease.

 In the opposite case when its price is greater than $1. Let's say it reached 1.2 dollars. Dealers try to buy Luna with a value of 100 dollars, then transfer it to UST and get 102 dollars, and tera burn the corresponding Luna coins, and this leads to an increase in UST coins, so the supply increases and its value decreases to balance at 1 dollar.

 The criticism directed at the algorithm is that it does not take into account all possible cases and does not assume the occurrence of many scenarios, and dealers refrain from buying or selling for reasons other than supply and demand such as fear and the spread of negative feelings.

This is what happened in May 2022 when the value of the UST terra dollar fell to 0.68, after fear spread among many, which prompted one of the large owners to offer 285 million dollars of UST on the open market between May 7-8, 2022. The increase in supply led to a decrease in the price of UST.