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Fundamentals

Terra

The Terra protocol is the leading decentralized and open-source public blockchain protocol for algorithmic stablecoins. The Terra protocol generates stablecoins that track the price of any fiat currency using a combination of open market arbitrage incentives and decentralized Oracle voting. Terra stablecoins can be spent, saved, traded, or exchanged instantly on the Terra blockchain. Luna grants its holders staking rewards as well as governance power. The Terra ecosystem is a fast expanding network of decentralized applications that is driving up the price of Luna while producing consistent demand for Terra.
Terra and Luna
Terra and Luna are the two primary coins in the protocol.
Terra: Cryptocurrency stablecoins that track the value of fiat currencies. By burning Luna, users can create fresh Terra. Stablecoins are named after fiat currencies. For example, the base Terra stablecoin, TerraSDR, or SDT, tracks the price of the IMF's SDR. TerraUSD or UST, as well as TerraKRW or KRT, are other stablecoin denominations. Terra denominations are all found in the same pool.
Luna: The Terra protocol's native staking token, which absorbs Terra's price fluctuations. Luna is utilized in administration as well as mining. In exchange for transaction fee benefits, users stake Luna with validators, who record and validate transactions on the blockchain. The more Terra is consumed, the more valuable Luna becomes.
The Terra Protocol's Operation
Stablecoins
Stablecoins are the main feature of the Terra protocol. The Terra protocol uses the basic market forces of supply and demand to maintain the price of Terra. When the demand for Terra is high and the supply is limited, the price increases; when the demand increases and the number of Terra stablecoins decreases, the value of Terra decreases. When the demand for Terra is high and the supply is limited, the price of Terra increases.
Expansion and contraction
Users burn Luna to mint Terra and burn Terra to mint Luna, all incentivized by the protocol's algorithmic market module. To maintain the price of Terra, the Luna supply pool adds to or subtracts from Terra's supply.
Expansion
Terra Luna's protocol incentivizes users to burn Luna and mint Terra. Users mint more Terra from burned Luna until Terra reaches its target price. The Luna pool gets smaller in this process, increasing the price of Terra as a result.
Contraction
When the price of Terra is too low relative to its peg, supply of Terra's own Luna is limited. More Luna is minted until Terra reaches its target price. The protocol incentives users to burn Terra and mint Luna.
Luna is the variable counterpart to the stable asset Terra. By modulating supply, Luna’s price increases as the demand for stablecoins increases.

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