Terra Columbus-5 Network Upgrade Goes Live

Columbus-5 will see Terra burn all seigniorage generated by the growth of the UST stablecoin supply.

Terra Columbus-5 Network Upgrade Goes Live
Shutterstock cover by Patsy Michaud

Key Takeaways

  • Terra has launched Columbus-5. The upgrade involved a shutdown of the old chain and migration to a new chain.
  • With Columbus-5, 100% of the $LUNA seigniorage generated by the expansion of the $UST supply gets burned.
  • The update is expected to help Terra's DeFi ecosystem grow.

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Columbus-5, Terra’s most significant mainnet upgrade to date, has successfully launched.

Terra Migrates To New Network

Stablecoin-based Layer 1 blockchain Terra has completed its Columbus-5 upgrade.

The Terra team announced the update on Twitter today.

The migration from Columbus-4 to Columbus-5 was completed at block height #4,724,000.

Columbus-5 introduces significant changes to the Terra network. The two most important updates include a LUNA token burn and integration with Cosmos’ Inter-Blockchain Communication (IBC). LUNA forms a key part component of Terra and its algorithmic stablecoin, UST.

All LUNA generated when the supply of UST increases will get burned, similar to how Ethereum’s EIP-1559 update burns ETH with every transaction. Meanwhile, the integration with Cosmos’ IBC will open the doors for interoperability with other IBC-compatible blockchains.

Unlike Ethereum’s recent London upgrade, the move to Columbus-5 involved a shutdown of the old chain and migration of the code to a new chain from the state of the last block.

The Seigniorage Burn

While other blockchains rely on stablecoins issued by centralized operators, Terra uses algorithmic stablecoins that track the price of different fiat currencies. UST is the most popular token on the network.

The stability of the peg is achieved by algorithmically adapting the stablecoin supply according to changes in demand. It also leverages a seigniorage mechanism that burns LUNA tokens to mint UST.

Before Columbus-5, a portion of the seigniorage required to mint new stablecoins was used to reward validators, and another portion was allocated to the community pool. With Columbus-5, the whole supply of the LUNA seigniorage will get burned instead of going to validators and the community pool. This means that $1 worth of LUNA will get burned for every $1 of UST minted.

The update should benefit validators and LUNA holders as the supply will become more scarce as demand for the Terra ecosystem grows.

To counteract the previous seigniorage allocated to Luna validators, Columbus-5 will allocate a portion of the fees for swapping tokens on Terra to ensure that the ecosystem continues to capture value without sacrificing the incentives for network validators.

Moreover, the new upgrade will burn $1 billion from the existing community pool to route to an insurance pool. Instead of a previous community pool, the new upgrade will burn $1 billion via the LUNA to UST swap function to bootstrap an insurance protocol called Ozone. The protocol will give protection against losses that occur in Terra’s DeFi ecosystem. A governance vote will decide how the remaining $2.5 billion in the community pool gets used.

Integrating With Cosmos IBC

Besides the economic changes, Columbus-5 has integrated with Cosmos’ cross-chain communication protocol, IBC. Terra was created using the Cosmos software development kit (SDK), which means it’s fully compatible with the network. By deploying IBC, Terra has become more interoperable with the broader Cosmos ecosystem. The integration will allow for the seamless exchange of assets and data between Terra and other application-specific blockchains in Cosmos.

Columbus-5 has also initiated the new Stargate Cosmos SDK and the latest CosmWasm version, allowing for more flexible smart contracts upgrades on the network. The new upgrade includes other protocol and application structural changes that make the network developer-friendly, allowing for more flexible dApp development.

LUNA saw an uptick on the successful launch of Columbus-5. According to CoinGecko, Terra’s native token is up more than 5,200% year-to-date, increasing from $0.65 to $35.50. LUNA’s explosive price action can partly be attributed to the growth of the network’s DeFi ecosystem, which includes popular projects like TerraSwap, Anchor Protocol, and Mirror Finance. By adding deflationary pressure to LUNA, Columbus-5 is expected to boost Terra’s DeFi ecosystem.

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