What investors should know about Terra and its token Luna3 min read

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Luna, the native token of the Terra blockchain, is up over 23% in the last seven days, according to CoinGecko.

Now ranked No. 9 among the top cryptocurrencies by market value, Luna hit an all-time high on Sunday of over $103 and is currently trading at around $97. Luna started the year priced below $1.

“It has been on an absolutely spectacular run,” Matt Hougan, chief investment officer at Bitwise Asset Management, tells CNBC Make It. “It’s been largely impervious to the recent market volatility, falling less and recovering faster than its peers.”

Despite the hype around Terra and its token Luna, it’s important to research and understand the risks before investing since financial experts view cryptocurrencies as volatile, speculative investments. As quickly as one reaches a new high, it could go back down.

What’s Terra?

Created by start-up Terraform Labs and its co-founders Do Kwon and Daniel Shin in 2018, the Terra blockchain underpins a decentralized finance (DeFi) ecosystem that creates algorithmic stablecoins. Stablecoins, or cryptocurrencies pegged to reserve assets like the U.S. dollar, are frequently used in DeFi applications like lending or borrowing.

“Terra is the hot dot among the cool kids in crypto right now,” Hougan says. “People love the team behind Terra, and they love all the various applications being built on it right now.”

With nearly $18 billion in total value locked, Terra recently became the second-largest DeFi protocol behind Ethereum, according to data provider DeFi Llama.

According to its white paper, Terra operates on a proof of stake model, where validators verify transactions according to how many coins they hold. Proof of stake supporters say it is significantly less energy intensive than other models and has less of an environmental impact.

Luna’s holders are granted governance rights and voting power for the protocol, since Luna is Terra’s native token. But investors should understand that Luna is also used to regulate Terra’s stablecoin pegs, which means that Luna is “in the center of the shock absorption process if something goes wrong with the stablecoins on the Terra platform,” Hougan says. That can be a risk of buying.

What are the risks?

How does it compare to Ethereum?

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