How Does Terra Work?
Terra (ticker: LUNA) is a price-stable cryptocurrency that aims to power the next-generation payment network and grow the real GDP of the blockchain economy. Terra utilizes a double symbolic framework, which is made out of Terra – the stablecoin – and Luna, the guarantee token. 
In November 2020, Terra partnered with Kadena with the aim of expanding Kadena's DeFi (Decentralized Finance) platform.
In January 2021, Terra raised $25 million in a funding round from Galaxy Digital, Coinbase Ventures, Pantera Capital, and others.
Terra is an algorithmic stablecoin that was built with the Cosmos SDK and Tendermint, a Byzantine Fault Tolerant proof-of-stake (PoS) consensus algorithm. The Terra stablecoin is collateralized by a second native token called Luna (LUNA).
Founded in 2018, Terra launched with $32 million in backing from Binance and Polychain Capital, among others. Each Terra stablecoin (such as TerraUSD or the one tracking the South Korean won, TerraKRW), relies on the system’s LUNA token to maintain its peg.
In January 2021, Terra raised $25 million in a funding round from Galaxy Digital, Coinbase Ventures, Pantera Capital, and others. Previous investors Hashed, Arrington XRP and Kenetic Capital also participated in the round. Terra’s co-founder Do Kwon said in a press release:
“We look forward to using the funds for building key pieces of infrastructure in the Mirror Protocol for synthetics, Anchor Protocol for savings and other killer DeFi applications to make Terra’s algorithmic stablecoins the centerpiece of the decentralized finance movement.”
In November 2020, Delight Labs launched Automated Market Maker protocol Terraswap on the Terra blockchain. Inspired by Uniswap, Terraswap creates automatic, decentralized markets for token pairs allowing users to exchange assets directly on-chain. Pairs can be created between native Terra assets (Luna, UST, KRT, etc.) and CW20 tokens (user-defined tokens). Terraswap debuted with four active Terra stablecoins (UST, KRT, MNT, SDT) against Luna, competing against Terra’s native on-chain atomic swap. These starting pairs diversified on-chain liquidity and provided a more robust means to arbitrage that does not alter the supply of Terra and Luna, thereby enhancing the stability mechanism.
What is Terra?
Luna is the native staking token of the Terra protocol.
Through its role in collateralizing the mechanisms that secure the price-stability of Terra stablecoins and modulate the incentives of validators, Luna serves as a foundational asset for the entire Terra network and ecosystem.
Luna can exist in three states:
Unbonded: This is Luna that can be freely transacted as a regular token, with no restrictions.
Bonded: While Luna is bonded, it is considered staked and generates rewards for the delegator and validator it is bonded to.
The Luna cannot be freely traded and is locked in the ecosystem until it is fully unbonded.
Unbonding: Luna that is instructed to be undelegated from a delegator transition into an "unbonding" state during which neither rewards accrue nor the Luna can be freely traded.
This unbonding phase takes 21 days to complete, after which the Luna returns to an unbonded state.
The primary function of Luna is to protect the integrity of Terra mechanisms by locking value within the Terra ecosystem through staking.
However, in providing network security, Luna holders and delegators are exposed to the risks of maintaining a long-term position on a fluctuating asset.
Staking rewards, therefore, provide the incentives to keep long-term interest in Luna ownership.
In the Terra protocol, staking rewards are first distributed to validators who take a commission for providing their operations and then are withdrawn individually by delegators.
Rewards from stake are determined largely by the relative size of the stake and are structured in such a way that rewards increase as transaction volume increases.
Staking rewards come from three sources: gas (compute fees), taxes, and seigniorage rewards.
Gas is a fee that is added to each transaction to avoid spamming.
Validators set minimum gas prices and reject transactions that have implied gas prices above this threshold.
At the end of every block, the compute fees are disbursed to the participating validators pro-rata to the stake.
Taxes are used as a stability fee, and 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.
Validators participate in the Luna exchange rate oracle process and win rewards from the seigniorage pool every time they vote within the reward band, proportional to their stake.
TerraUSD is an algorithmic stablecoin, where the cost of minting is equal to the face value of the stablecoins minted — in order to mint 1 TerraUSD, only $1 worth of the reserve asset (LUNA) must be burned. In late 2020, Terra launched a new bridging protocol, Dropship, that allows Terra stablecoins to migrate from the Terra mainnet to other blockchains.
Daniel Shin – Co-founder
Do Kwon – Co-founder
Nicholas Platias – Co-founder  
In September 2020, Terra partnered with Hex Trust, the leading DeFi digital asset custodian, to enable investors to hold and stake Terra stablecoins and $LUNA with their fully licensed and insured custody platform.
In October 2020, Terra partnered with Velo Labs to build out a next-generation payment system.
Terra and Velo Labs will explore stablecoins swap opportunities leveraging Velo Labs’ federated credit exchange network.
Terra will also integrate with the Velo Protocol to power the use of blockchain technology on cross-border payments in Asia and globally.
Velo Labs and Terra will work towards the development of synergistic blockchain payment solutions serving small- and medium-sized enterprises and international travelers in South Korea.
In October, terra also partnered with Lumos Labs to launch Think with Terra - an ideathon engaging Indian developers and challenging them to conceptualize ideas that can take on real-world challenges that people face on a daily basis.
The Ideathon featured four exciting tracks: the Logistics Track , the FinTech Track , the eCommerce Track , and the Bonus Track.
The first three tracks were focused on accumulating industry-specific ideas and the bonus track encompassed any other area of need that blockchain-based payments solutions can disrupt.
The innovators who shared won prizes ranging from Xbox Series X to Amazon Echo Dot. The Ideathon also featured a series of meet-ups and tech talks that would help educate the Indian developer community about blockchain tech, its applications in payments, and how Terra can help.
In November 2020, Terra partnered with Kadena with the aim of expanding Kadena's DeFi (Decentralized Finance) platform. Kadena said it will add Terra’s Luna stablecoin to its Decentralized Exchange (DEX) Kadenaswap, which was announced earlier in September and is expected to roll out at the end of the year. The first stage of moving Terra and other coins in and out from one network to another via Kadenaswap will be carried out in 2021.
In January 2021, Terra partnered with Hummingbot, the open-source platform for creating customizable trading strategies. The partnership focused on the implementation of a custom arbitrage bot for executing arbitrage trades between TerraSwap and other centralized or decentralized exchanges (DEXes). The bot for Terra Arbitrage is version 0.34 of Hummingbot’s popular AMM Arb pre-built trading strategy template. With it, Hummingbot users can plug into the Terra blockchain and execute arbitrage trades between LUNA and Terra stablecoins (e.g., UST) between TerraSwap and both CEXs + DEXs. In particular, AMM Arb executes arbitrage strategies between AMM DEXs, like TerraSwap, and central order-book exchanges where Terra assets are listed — such as Bittrex.
In January, Terra partnered with Axelar to bring interoperability to the Terra ecosystem. Axelar's integration with Terra is rooted in the shared vision of making liquidity accessible to any user, enabling Terra to be interoperable with the blockchain ecosystems supported by the Alexar network via a universal gateway and protocol.