Teun Kerkhof - 22 September 2021

Terra’s upcoming upgrade Columbus 5

There is an exciting network upgrade coming to the Terra blockchain. In this post we explain what the Terra blockchain is and what changes are coming to the ecosystem.

Platform

Terra is an application-specific delegated-proof-of-stake (DPoS) blockchain using Tendermint consensus that’s built on the Cosmos SDK. Blockchains built on the Tendermint framework can connect to the Cosmos Hub and the framework allows for interoperability. This makes the blockchain highly scalable and interoperable. 

The protocol has two major components: the governance and utility token LUNA, and Terra native stablecoins. Those stablecoins are pegged through a seigniorage mechanism. This means that anyone can burn and mint UST on the open market for LUNA:

  • Minting 1 UST requires burning $1 worth of LUNA – contracting the LUNA supply and expanding the UST supply.
  • Redeeming $1 LUNA requires burning 1 UST – contracting the UST supply and expanding the LUNA supply. 

The stablecoins are the most important part of the ecosystem as the idea is to make those the best form of money. In a completely decentralized manner, users on the Terra blockchain can spend Terra stablecoins, save, and invest, without having to leave the ecosystem (in theory). As of now only a few regions in the world accept UST as a currency (mostly in Korea through the Chai app). The other aspects are available through various protocols on the Terra blockchain. For example Anchor that offers depositors a yield of 20% on stablecoins and currently has a TVL of $4bln. 

Columbus 5

As of writing there are only 8 protocols live on the blockchain. On the one hand, because the network is still relatively new compared to others, on the other hand it still lacks some scalability for other projects to go live. This changes with Columbus 5, a network upgrade set to go live at the end of the month that will bring more scalability and new features, followed by the launch of dozens of new projects. 

One of the more important changes are the increased max gas cap per block and the oracle transaction prioritization. This improves the on-chain experience on Terra and will enable other protocols to launch on the chain without any problems. This is important as a lot of projects are developing and are ready to be deployed on the Terra blockchain. Additionally, the upgrade will burn more LUNA when UST is minted. The new projects that utilize UST will drive more demand for UST. That needs to be minted, thus LUNA needs to be burned. These aspects amplify each other and as more LUNA is burned the upwards pressure on the token price increases. 

Conclusion

Terra is currently number 13 in terms of market capitalization at $11bln. Columbus 5 will bring a lot more utility and economic activity to the chain, and we expect the Terra network to grow in terms of TVL and active users over the coming months. Their thesis to make their algorithmic, decentralized stablecoins the best form of money is idealistic, ambitious, and yet interesting to follow.