This article was written before the Luna Crash.
Terra is a blockchain protocol that enables the issuance of algorithmic-based stable coins that track the prices of various fiat currencies.
In this guide, we will be looking into how the project uses staking to achieve consensus. More importantly, you will learn how to stake Luna to earn passive gains, why it’s worth staking your coins, and other ways to use Terra.
Can Terra Luna Be Mined?
No, Terra Luna cannot be mined because it’s a decentralized finance (Defi) protocol based on the Cosmos SDK that uses the Delegated Proof of Stake (DPoS) consensus mechanism as opposed to Proof of Work (PoW) mining.
The biggest difference between the DPoS staking and PoW mining is that with the former, you only have to apportion your assets to qualify as a network validator.
In contrast, with the latter, you have to participate in an arms race for the most efficient and powerful equipment.
When it comes to mining, one needs three essential things:
- Mining equipment – that is specific to the mining algorithm used by the network;
- Mining pool – typically, mining within a pool increases one’s chances of creating a block within a network;
- Technical know-how – because mining can get extremely complicated, and technical skills are invaluable in this venture.
Staking circumvents the need for the above-stated items. For a casual investor in the Terra ecosystem, you do not need to invest in equipment, join a mining pool or even understand how staking works.
Therefore, it is not possible to mine LUNA. There are several options for small players looking to mine cryptocurrency. However, if what you seek is passive income, then staking LUNA is a great option.
Additionally, you get to participate in the governance of the project by either making or/and voting on improvement proposals.
What Is Luna Used For?
LUNA is Terra ecosystem’s native cryptocurrency. The coin serves four main functions, which are:
- Utility token – LUNA is used to pay for transaction fees within the ecosystem;
- Governance – anyone that wishes to participate in governing Terra has to acquire LUNA coins. LUNA holders have the right to vote and make proposals (also called Terra improvements proposals);
- Staking – as a DPoS network, Terra employs LUNA as an incentive for transaction validators. Also, LUNA holders can earn passive income by delegating transaction verification rights to the node operators;
- Stablecoin value modulation – LUNA plays an important role in ensuring that the value of a Terra stable coin pegged to a fiat currency is maintained.
Read our article comparing Terra Luna Vs Bitcoin.
Why Stake Luna?
According to Terra’s documentation, staking is “the process of bonding Luna to a validator in exchange for staking rewards.” From the definition, you can easily pick up the main reason to stake your LUNA coins: for rewards.
Essentially, both the delegates and the delegators within the Terra ecosystem get rewarded for staking their coins.
The node operators get a higher reward for their service, but the delegators also get to share in the earnings.
Is Staking Worth It?
Staking involves locking coins or tokens in a contract address to validate transactions. In delegated systems such as Terra Luna, the actual validation is only reserved for node operators who are often limited to a certain number to increase network throughput.
The ones that delegate their tokens are free to do so and to choose whoever to delegate their tokens.
However, the caveat is that the higher the stake a validator has, the higher the chances they have of creating a block and therefore earning more in rewards.
This principle applies even to PoS networks (those without delegation). Meaning all staking networks incentivize their native token holders to stake more assets to increase their returns.
Staking can be worth the risk it for various investors because of the following reasons:
- Passive returns – stakeholders are given the opportunity to earn passive returns;
- Incentive system – staking serves as an incentive for node operators to discourage malicious behaviour;
- Governance – typically, only stakeholders are allowed to participate in the governance of a blockchain through voting and sometimes (like in the case of Terra) making proposing improvements.
Other than the direct material rewards of staking, this type of consensus mechanism has several advantages over its mining counterpart. These include:
- Eco-friendliness – blockchain networks that use staking tend to consume less energy, making them much more environmentally friendly;
- Scalability – staking has the potential to enable fast transactions on the networks it is employed;
- Cost-effectiveness – staking can contribute to reducing transaction costs which make PoS and DPoS systems more attractive to users than those that use mining to achieve consensus.
Learn more about how Luna is eco-friendly due to its use of staking.
How To Stake Luna?
Here are the steps to staking LUNA:
- Download Terra Station, the official Terra Luna wallet available on mobile, desktop and as a web browser extension;
- Create your wallet and back up the private keys;
- Log into your wallet and transfer some LUNA coins to it from an external wallet such as an exchange;
- From the homepage, tap/click on [Staking] to go to the validators’ page;
- Scroll to locate a preferred validator and click or tap their title to open their details page;
- On the delegations section, click/tap on [Delegate] tab;
- Fill in the amount of LUNA coins to delegate and specify which token to use when paying transaction fees;
- Provide confirmation of delegation translation by entering your wallet password.
Alternative Coins Good For Mining
If you prefer to mine as opposed to staking, here are a few coins worth considering:
- Ethereum (ETH);
- Raven Coin (RVN);
- Beam (BEAM);
- Decred (DCR);
- Litecoin (LTC);
- Dogecoin (DOGE).
Why Is Terra Luna Dropping?
Terra Luna, like most cryptocurrencies, is prone to extreme price volatility given its relatively small market share and novelty in the marketplace. A majority of its stakeholders are retail investors who are considered ‘weak hands’ and therefore sell fast at the slightest provocation.
Learn more: Terra Luna Vs. Atom
Staking has several advantages not just for Terra Luna but across most blockchain networks that employ it as a method to achieve consensus.
In this guide, you have learned how to stake Luna, use it and why it is worth your time. Hopefully, you are now better informed about the opportunities of investing in crypto and especially staking coins.