Love ya from the Terra to the Luna
Second release: Luna Tokenomics at your fingertips
This is the second release of Terra Money at your fingertips series. After becoming a #Lunatic-fanatic, in this article I walk through some of Luna Tokenomics.
What is tokenomics?
Tokenomics makes reference to the economic aspects of a token. It is a broad new field in cryptocurrencies, intertwining economics with the technological engineering of a token. Unlike traditional economic analysis where the expected monetary outcomes are analyzed given certain market rules, in tokenomics the rules of the token are designed based upon desired outcomes.
Example: in traditional economics we can ask what would happen to the price of commodities if the price of oil increases, whereas in tokenomics we can ask what would be the inflation policy of the token given a target in user’s adoption.
Tokenomics combines different aspects at the micro and macro level. At the micro-level, the build-in properties of the token such as security, incentives, functionalities & utility of the token, and monetary policy (inflation, vesting, etc.) are covered; whereas at the macro-level, aspects such as governance, distribution, synergies with other technologies, regulation, and the ecosystem’s growth are considered. As it can be seen, tokenomics requires a holistic comprehension of the protocol, along with the market -use cases- and mechanism design.
Tokenomics of a digital asset is key for investors, traders, developers, etc., because a token with robust tokenomics can be more resilient during ‘bear’ markets, and the different developments can expect sustainability for their projects too.
Luna Tokenomics
Luna is the Terra protocol’s native staking token that absorbs the price volatility of Terra. In this article, I cover several aspects such as utility, monetary policy, vesting, governance and the ecosystem’s growth.
Utility of Luna
Luna token has several functions that contribute to its demand:
1. It is a lever for stability in the dual coin system: generates staking/mining rewards.
2. It also used as a governance token.
3. It is a cryptocurrency to be traded in secondary markets.
Monetary Policy in Luna
Luna is a token with three phases:
If Luna is bonded, it is considered staked, and generates rewards for the delegator and the validator (miner) it is bonded to. The Luna cannot be freely traded, and is locked in the ecosystem until it is fully unbonded. Luna that is instructed to be undelegated transitions into an “unbonding” state of 21 days during which neither rewards accrue nor the Luna can be freely traded. When Luna is unbonded, it can be freely transacted as any other cryptoasset.
In the origin, Luna generated rewards due to seigniorage (the value of a coin minus the cost of its production). Seigniorage was diverted to Terra’s Treasury to fund new developments in Terra blockchain. After the Columbus-5 upgrade, Luna is no longer a token with seigniorage rewards, therefore when the price of Terra stablecoin is above the peg, an expansionary monetary policy occurs in the protocol minting Terra stablecoins, and burning Luna until the peg of the Terra stablecoin is reached.
Recalling that Terra Money seeks a long-term demand for mining, by keeping miner’s rewards predictable and stable. Without seigniorage, Terra miners are compensated with fees and increased staking rewards (10.16% APR on average as of writing this article).
Luna’s Distribution
The protocol contemplates a total supply of 1 billion Luna where the initial distribution was determined as follows:
In the genesis distribution, 50% of the tokens were distributed for Terra’s stability and the core developments of the protocol; whereas 4% was genesis liquidity and 46% in backers of the Initial Coin Offering, employees and contributors. Luna originally sold US$ 72 million among investors such as Binance, Huobi, OKEx and Venture Capitals including Polychain Capital, #Hashed, 1KX, Arrington XRP Capital, Rockaway Blockchain Fund and Kakao Ventures. In that private sale 10 million Luna were allocated whereas during the ICO, other 385 million Luna were sold at 0.80 each.
Luna’s Vesting
Vesting is the process of locking and distributing purchased tokens within a given timeframe. This is an important metric to avoid a huge sell-off once the token is listed in decentralized or centralized exchanges which could drag the price down. In pre-seed investment or private sales, the common vesting is a “cliff”, that is, a durational lock placed on tokens ahead of the vesting schedule.
Terra’s cliff for pre-seed and seed investors followed a linear vesting (i.e., when founders keep custody and maintain a book where the token release schedule is structured and release occurs through airdrops via basic token senders). In the case of private investors, instead of at cliff points, a block linear vesting from month 4 to 9 was established.
What do we know about Luna release for contributors and employees?
By December 2020, almost 5% of tokens for employees were granted. Earlier this year, other 20k Luna were distributed to contributors and early investors. Tokens for employees are evaluated in a case by case manner due to turnover. Luna is released directly or via Terra DeFi protocols such as Anchor. As long as there is a vesting scheme for a section of total Luna supply, the risk of a sell-off is low.
Now…. the intriguing inflation
Thus far, the Luna in circulation is 391.24 million, and 92.81 million Luna have been burned as of writing this article. Luna’s price has been growing in a steady basis in a one year lap, reaching a new ATH on November 30,2021.
So…is Luna an inflationary or a deflationary token?
Luna is a deflationary token with a fixed supply. All minted Luna above the maximum supply will be burned and there is no inflation rate assigned by the protocol. Recalling that Luna is part of a dual-coin algorithmic stablecoin system where supply and demand adjust dynamically, the more Terra stablecoins are used, the more Luna is worth, altogether with Luna being burned. At present, these two factors, are converging for its price increase.
Luna’s Governance and Ecosystem Growth
The Terra protocol is a Proof-of-Stake public blockchain. Users and validators make changes to the Terra protocol. Community members submit, vote, and implement proposals. Nonetheless, Luna tokens are centralized with only 130 validators for staking is a small number (compared with the more than 3,000 stakers in Cardano). Nonetheless, Terra-Luna ecosystem continues growing steadily in DeFi with smart partnerships that create multiple bridges with other blockchains, powering the potential of DeFi adoption.
For instance, the Terra Bridge with Ethereum and Binance Smart Chain (BSC); Shuttle bridge with BSC; the Wormhole bridge with Ethereum and Solana; Axelar bridge with layer 1 blockchains; Intellabridge, that is a mobile banking dApp “Kash” bringing Mirror and Anchor (two major DeFi protocols in Terra-Luna Ecosystem) to mainstream audiences; LoopFinance, the AMM DEX with ERC-20 tokens, Terra and SPL or the partnership with Injective Protocol, a decentralized derivatives and synthetics protocol using Mirror assets….and whatever comes in the next months…
