Research & Analysis on Terra Validators and Delegation of $LUNA

Terra’s ecosystem, alongside its native token $LUNA, is currently gaining tremendous traction. Currently, the price has passed the $30 mark and is now sitting at number 12 rank by market capitalization. So, it is very clear that Terra has the potential to become a mainstream Layer 1 blockchain with a plethora of use cases.

Terra is the only blockchain that directly accrues value as capital enters the ecosystem. Some opinions also say that Terra can be bear-proof. This is because $1 of $LUNA is burned every time $1 of $UST is minted. Therefore, $LUNA’s total addressable market for USD alone is more than $2 trillion. The potential for value accrual from non-USD stablecoins will grow over time. CHAI, a popular payment app in Korea which utilizes KRT, Korean Won shows a high demand for bringing currency other than USD on-chain.

Terra is the only blockchain that supports a fully decentralized and algorithmic stablecoin. Centralized issuers such as Tether for USDT or Circle for USDC are subject to heavy government regulation, and censorship in the future is very possible. $UST represents a permissionless and global currency. UST has become the 5th largest stablecoins by market capitalization with $2B+ and daily volume of more than $200M. The Luna ecosystem has generated massive demand for UST with no major listings which shows clear product market fit.

In this article, we will shed some light on Terra ecosystem and how to choose the best validators to entrust you LUNA with the help of on-chain analytics. Big thanks to Flipside Crypto for the analytics platform that we fully utilize to write this. Among the topics covered in this paper are analysis on validators, delegators, delegations, whale vs retails activity, rewards and commissions.

While choosing a staking provider it is important to keep in mind that you are never 100% safe. For example, if a validator misbehaves its stake will be penalized hurting both the validator and those who stake with it. Therefore, it is crucial to choose the validator with a good reputation.

We can see that the $UST supply changes over time from graph below.

UST supply changes

(UST supply changes; courtesy of https://terra.smartstake.io/

But how ‘decentralized’ is LUNA?

Validators that are chosen to validate transactions also depend on the amount stake. This means the more Luna being staked, the more reward will be earned by them. This section we analyze how ‘Decentralize’ is staked on all validators on terra blockchain. By aggregating all the delegated luna on all validators, we plot out the concentration of staked luna by percentage. We start counting from the largest validator and go down to the smallest validator and count how much of the validators needed to reach a concentration of 95%. Of course the more the better as it means the concentration is more distributed overall. Delegated or staked amount of LUNA represent the voting power of certain validators. A decentralized network does not want a over power entity and the better case is when there is more validators needed in achieving the 95% of concentration of staked LUNA. (95% is just the assumption and can use any percentage)

Concentration of staked LUNA

https://app.flipsidecrypto.com/velocity/queries/fe87f5e9-605e-48bf-9ddd-efbee02f8e84

Data by https://www.flipsidecrypto.com/

As we see from the above table, we need a total of 76 validators out of 116 active validators to reach a concentration of 95%. There are 40 validators for another 5% of voting power. This is not encouraging as this means less validators contain more votes and can be dominating the network if the worst case.Since Terra is less “decentralized” than other blockchain platforms like Ethereum, which is powered by thousands of interconnected computing nodes worldwide. That could make Terra less appealing to some blockchain purists. — by fortune article.

Gini index on Terra

Next we should measure the gini index for a better picture of distribution of staked LUNA (voting power).

What is gini index? Gini coefficient is often used as a gauge of economic inequality, measuring distribution or, less commonly, wealth distribution among a population. The coefficient ranges from 0 (or 0%) to 1 (or 100%), with 0 representing perfect equality and 1 representing perfect inequality. Gini index are widely used in the defi world in measuring the equality in pools like uniswap and others. Here we calculate the gini index to measure the equality of validators in terra. 0 representing all validators have the same voting power and 1 representing few validators are having control over others.

https://velocity-app.flipsidecrypto.com/velocity/visuals/1debbe83-bf73-4bcb-8bde-2162ecf38db0/3287524b-16a8-4363-8b4a-94957f604dc6

Gini index on terra

Retailer(blue) vs whale(red) vs small whale(green)

Data by https://www.flipsidecrypto.com/

In overall, the gini index sat above 0.5 which showed quite heavily shifted to inequality in voting power. From January 2021, we can see the gini index increasing until april correlated with the increasing delegation movement (will discuss later). This means delegators staked their LUNA to only certain validators causing gini index to spike up. Starting in June 2021, the gini index dropped rapidly and is now sitting at near the 0.59 range. This is caused by many new protocols that announce airdrop for delegators who delegate their LUNA to the protocol and we can see the increasing movement of redelegation (will discuss later). This helps to shift back to increasing equality in validators but the best will be dropping to below 0.5 which show overall improved equality in voting power.

Top Validators on Terra

Right now on Terra Station, there are 137 active validators. From data provided by Flipside, we can see the ranking of the top 113 validators as of today. These validators are ranked by their voting power; which is equal to the amount of $LUNA token delegated/staked to them.

Although validators play an important role in providing security in the Terra ecosystem, retail users and investors are also able to participate in the network by staking their tokens and earn rewards by doing so on Terra Station . As Luna is a native asset in the Terra blockchain, those who stake Luna literally make a long-term investment in the growth of the ecosystem.

While choosing a staking provider it is important to keep in mind that there are some risks of loss of funds. There are many factors that need to be taken into consideration before choosing the best validator that suit for you.

As of now, the top 10 validators are;

Top 10 validators

Full list can be viewed from;

https://velocity-app.flipsidecrypto.com/velocity/visuals/bafb5a5b-c720-4c52-8014-35816e6f452c/f2522bb9-9f1b-42e6-a056-ea6f5b62a905

When choosing validators, we want to choose one that is established. Among the top 10 validators, there are 5 validators (B-Harvest, Dokia.Capital, Staked, Staking Fund, hashed) that have been live since the start of Terra. Orion.Money is the youngest among top 10 but they showed up as the top validators dashboard. The top 5 validators had been lived for more than 600 days and the youngest Orion.money had just been live for more than 100 days. We expect more and more validators will show up as top validators as they announced some unique airdrop to attract terra users to delegate to them.

Days since live for top 10 validators

Data source; https://velocity-app.flipsidecrypto.com/velocity/visuals/a39bff83-f312-464a-8fa0-3c2ac1eb2f1d/f67f0a0d-d3a4-4e70-9f36-ee374ea58c6d

Top Delegators on Terra

Let us take a look at the top delegators. The graph from Flipside below shows data for the address with the most delegation currently. The highest delegation from this address, terra1dp0taj85ruc299rkdvzp4z5pfg6z6swaed74e6 which is the wallet address for Terra Foundation. We also see that this address staked to 40 different validators. But the other addresses in top 5 delegated to one or two validators only.

Top delegators

Data by https://www.flipsidecrypto.com/

https://velocity-app.flipsidecrypto.com/velocity/visuals/6be36383-ceb7-45cb-b6a3-060573c4242d/f50a8268-357e-4c9a-bb7d-7e6c30a4ce72

Top 5 delegators

https://velocity-app.flipsidecrypto.com/velocity/visuals/b02b53bb-bb30-4aab-8e23-a82916430605/b9f6bc7d-8392-4b6e-aa50-69a12f59f19b

The Terra Foundation is the treasury which provides support for the Terra ecosystem’s growth and adoption. They sponsor many new validators that have potential to help them grow. Terra Foundation wants to increase adoption of Terra network and delegate to those validators in order to encourage their effort. Hence that is why we can see so many delegations in large amounts by this treasury wallet.

Whale vs Retail Delegator Analysis

Next we wanted to analyse which validators are the favourite for both whales and retailers. We group by the single transaction of delegation of luna.

Whale = single transaction in delegation of more than 10k luna

Small whale = single transaction in delegation of more than 1k but less than 10k luna.

Retailers = single transaction in delegation of less than 1k luna.

This is just rough number for ease in calculation and quick way to monitor their movement,

Before going into the choice of validator, let’s see how the daily transaction of delegation, and undelegation of Luna by whale and retailers.

https://velocity-app.flipsidecrypto.com/velocity/visuals/fde8c2b5-79ba-45bf-a792-72e173795f17/d5e78d8a-17e0-4700-beb1-3d0592a92932

Delegation movement by retailers vs small whale vs whale

Retailer(blue) vs whale(red) vs small whale(green)

Date by https://www.flipsidecrypto.com/

For retailers, more fluctuation can be seen on daily movement on delegation compared to whales. We can see the spike up in delegation volume on march 2021 which at the same time the shoot up of luna price. After that there is consistent daily delegation activities by retailers while no obvious movement from the whales side.

https://velocity-app.flipsidecrypto.com/velocity/visuals/ddc5896f-05f3-41cc-9654-b3f113278449/edffdb1b-1ae9-4f2a-a1c5-e97c396f0794

Undelegation movement by retailers vs small whale vs whale

Retailer(blue) vs whale(red) vs small whale(green)

Data by https://www.flipsidecrypto.com/

Next on the undelegation of luna by whales and retailers. There was a spike during march 2021 which is the same time when price of LUNA broke an all time high as all whales, retailers, and small whale are trying to unstake their LUNA for profit taking. Interestingly, more and more retailers are starting to undelegate their luna starting august 2021. This is correlated with the movement of luna price. Retailers are trying to take profit on investment. From the whales side, literally no movement by them. That is why the price of luna is sustainable as no whales are unstaking their luna.

Favorite validator by whales and retailers

We have seen the movement by both whales and retailers. Next up we want to see their favorite validators. We will only dive deep into whales and retailers in this part and skip for the small whale group.

https://velocity-app.flipsidecrypto.com/velocity/visuals/0bccc56d-4553-4d87-b0c9-166a86ebce37/853aa432-3f07-4be7-8b33-6bd32b6960a9

Top 20 favorite validators by retailers

Clearly we can see who is the favorite of retailers in delegating their LUNA. It is Orion Money. Orion Money is building a cross-chain stablecoin bank, powered by an ecosystem of dApps and infrastructure, to enable cross-chain stablecoin saving, lending, and spending. But why did all retailers love Orion? Is it because of their great product? Yes but no. Orion money has a total supply of 1 billion ORION and 4% of it will be airdrop to LUNA stakers. In Orion medium one can find all the details about the airdrop. It mentioned it will be airdropping a genesis airdrop to all luna stakers and Orion Validator Delegators. A separate portion of genesis airdrop will be allocated to all delegators who staked their luna with the Orion validator. Additionally, delegators who continue to stake their Luna with the Orion validator after the 5% commission is switched on, will be receiving monthly airdrops for a period of 12 months.

In conclusion, retailers like free money and are always in search of opportunity. Who do no like free money anyway?

Next up we want to see the favorite validators by whales

https://velocity-app.flipsidecrypto.com/velocity/visuals/f8ce3627-acf5-4d76-aaa4-9e838c50ed9c/78c078ed-9eee-4bfb-b5a6-9a6692edb3c0

Top 20 favorite validators by whales

There is a huge difference in top 1 and 2 of validators by whales choice. Let’s talk about smart stake first. Smart stake provides all terra users on all the on-chain metrics like the burned LUNA, circulating supply , airdrop reminder and all sort of dashboard and tools in helping out the community. Smart stake also is the top 4 choices by retailers in delegating their LUNA. The top 1 is whales and top 2 retailers favorite is Terran One. Who are they? From the tweet by Do Kwon below proved that Terran One is run by someone who had a deep relationship and is directly in contact with TerraForm Lab. Delegators are having confidence in Terran One although currently their website is just a website without any function. (https://terran.one/) Of course, they offer 0% commission taking for delegating LUNA to them and that is also one of reason of favourite choice by both whale and retailers.

Redelegations Activity on Terra

The validators list always changing and the validators always introduced new feature or products on their own site. So, we can see a lot of redelegation, where user move their staked $LUNA from one validator to another. There are multiple reasons for redelegation, such as;

  1. The present validator uptime is poor, resulting in a slashing in your stake. Both validators and delegators will be penalized if validator did not keep 100% uptime which will lead you to lose small percentage from your staking return.
  2. Validator having too much voting power which will make the reduce the decentralization factor in the protocol.
  3. For airdrops! Many validators offer ludicrous airdrop so if you are bullish on validator’s protocol, you may get some of their native token when you delegate to them.
  4. Distribution of airdrops. Too many LUNA staked may lead to less airdrops because it has to be distributed to all stakers.
  5. Commission rates of validators increase too much. No one like when their staking return decreases so we move to other validator which give higher return. However, you have to be careful because most of the new validators offer 0% commission to attract new stakers but they may increase exponentially in short time.

If you unstake(undelegate) your luna from a validator, before you stake it on a different validator, your Luna will be temporarily locked for 21 days. You will receive it in your wallet after 21 days and will be able to stake on another validator. So in order to change validator without losing those sweet returns, Terra allow you to redelegate.

Now we move on to the analytics of redelegation activity on Terra thus far. The graph below illustrates the monthly redelegation volume, most redelegated to and also most redelegated from.

Redelegation by month

https://velocity-app.flipsidecrypto.com/velocity/visuals/82d4d2fb-902e-4233-b3aa-2b56039d8105/a84cb21f-5ba0-4de5-8372-e28f842b15fe

We can see that in July alone, close to 50M LUNA tokens being redelegated. This is the time when most of the new protocols showed up and announced their roadmap. They also announced their native tokenomics and will allocate a portion of it to incentives LUNA stakers . Besides that, they will give EXTRA airdrops to those who are delegating to them. Further below we will see where user most of the redelegated LUNA go to.

Top redelegated to validators

https://velocity-app.flipsidecrypto.com/velocity/visuals/a7d3a30c-acde-4776-9bad-9749eef2eede/01dfe1f4-4e8a-4316-85ec-ce5a4d63f2f9

The most redelegated to is Orion.Money, followed by Terran One, Mosaic, Smart Stake and then Staky.io. If you still remember, Orion.Money is ranked second in validator ranking by voting power despite being the youngest among top 10 validators. This shows how much trust LUNA hodler have in Orion.Money’s protocol. Also it correlates with the news of their airdrop announcement.

Terra Validator’s Rewards & commission

A larger portion of Luna tokens staked results in a larger share of the tx fees received. Transactions on the network charge a 0.1–1% fee per transactions. Then, these earned rewards from transactions processed in the network are distributed to those staking Luna tokens. Rewards are largely received and distributed in stablecoins, since most transactions on the network happen denominated in stablecoins.

Other than transactions, rewards also come from compute fees (or gas fee) where validators may set minimum amount to prevent spamming. At end of each block, the compute fees will be paid out to participating validators pro-rata to stake. In addition, validators that take part in Oracle Exchange Rate will get portion of seigniorage. Swap fees; which is a small spread will be charged for every swaps.

Now let us see some on-chain analytics for rewarding so that we can have better perspective.

https://app.flipsidecrypto.com/velocity/visuals/307a41e8-4097-4035-b624-223e43bca895/0e61df43-87d1-436f-a184-ce9eb55dbc38

Total cumulative reward by top 10 validators in LUNA

Data by https://www.flipsidecrypto.com/

We compute the cumulative reward earned by current top 10 validators, top 3 are hashed (with self stake the most), Terran One, and Mosaic (both 0% commission). These validators outran the other validator although it contained lesser delegated LUNA. This could also mean they are more active in earning rewards compared with other validators. In retrospect, one could consider delegating to the validators with higher reward and lesser commission fees to maximize their return.

If the reason for your LUNA staking is just to maximize return then you might want to look into this list of 0% commissions so that you will get all the return for yourself. However, there are plenty of validators offered 0% commission if you delegate to them. Although it could be very attractive to delegate to such validators, you should know that low commissions may be implemented for promotional purposes. One needs to study their service type and protocol they are trying to build. Nevertheless, notice the same protocol which offers 0% commission. What makes them unique and differ from the others? The very important and crucial similarity is they are trying to build for the community regardless of tools, research side, analytics or some specific service providers. Most delegators found benefit and felt more secure to delegate to those promising validators.

Dashboard by Staking Fund;

https://terra.stake.id/#Terra (LUNA) Blockchain Explorer by Staking Fund/

Conclusion

Terra ecosystem has grow at an exponential pace and will continue to do so especially with more adoptions. Retailers are joining it to get access to cheap transactions for selling their products and services, and users get attractive discounts for paying in Terra stablecoins. Developers also actively building range of new protocols and applications for the ecosystem to further scale it up and reach more users. With some of protocols on Terra that have gone mainstream such as Anchor and Mirror, we can expect Terra ecosystem to be one of the most important project in cryptocurrency world. Other than that, the explosion in demand of $UST for plenty of protocol will also project Terra to the moon. Do Kwon, Terra’s co-founder predicted that $UST will reach $10B by end of this year.

It is worth mentioning that staking doesn’t mean that you send your tokens anywhere. If you stake safely, you are in full control of your $LUNAs. Your tokens will be just bonded by the network until you decide to unfreeze them later for personal usage. Also, your token will literally cast an effective vote on certain governance proposals.

We hope this paper and analysis will provide some insights and guidance on where and how to stake your $LUNA. Nevertheless, make sure to do your on research and understand how Terra ecosystem works before choosing the best validator for you to stake your precious $LUNA.

A stock investor that step into crypto space and deeply into crypto now