LUNA is the default native coin of the Terra protocol. It provides support for reliability mechanisms and price stability for stablecoins released on the Terra ecosystem, as well as validator reward mechanisms.
The primary function of LUNA is to protect the functionality of Terra’s mechanisms. It happens through staking. Delegates pick out validators by voting for them with their coins, sending them to the stake.
But, providing the network’s security, LUNA holders and delegates are at risk for maintaining an unstable asset for the long term. In other words, there’s a risk that the coin price can become unstable. That way, staking rewards encourage users to hold LUNA for the long term. From a distance, every delegate will increase the amount of coins in their possession, which largely compensates for potential price fluctuation.
In the Terra protocol staking rewards are distributed among validators, who take fees for their services, and then individually taken by delegates.
The rewards distribute proportionally to every delegate’s share in the validator’s total stake. The bigger your stake, the higher your share, the higher your reward.
Staking rewards come from 3 sources: gas (fee calculation), taxes and seigniorage.
Gas is the fee taken for every transaction. The volume of the gas is set by validators. The transaction fee is sent to validators as a reward proportionally to their stakes.
Taxes are used as payments for the stability of stablecoin prices, the protocol takes a small fee percentage for every transaction ranging from 0.1% to 1%, 1 TerraSDR being the limit (~$1.44). Taxes are paid out at the end of every block in any coin on the Terra blockchain proportionally to the stake.
Validators partake in the oracle process of the trading cycle of Luna and get rewards from the seigniorage pool every time they vote, within the reward range, proportionally to their stake.
3 possible conditions for LUNA
Unbonded means the coin is not delegated, it was either never involved in it to begin with (if you just bought it), or it was called back (unbonded) from a validator. In this state LUNA can be interacted with like any other coin or token.
Bonded is the condition where the coin is delegated and locked from performing any kind of transaction. In this state LUNA rewards the owner. In the delegated state there are only a few things that can be done: calling back (unbond) and redelegation to another validator (this transaction can only be performed once in an unbond period — 21 days).
Unbonding is the condition where the coin is currently being called back from a validator. This process takes 21 days. In this time your stake won’t bring you any rewards and can’t be used in any way (transactions are unavailable). It’s impossible to cancel the unbonding process.
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