Terra
Last updated
Last updated
Terra (LUNA) is a cryptocurrency that was launched by the Terra community in July 2019. The LUNA token is the native token of Terra, a blockchain that was developed by a Korean-based firm known as Terraform labs. The token which was formerly known as LUNA is now known as Terra Luna Classic (LUNC).
The asset is now famous for the crypto crash that occurred in May of 2022: the token which sold as high as $80 per LUNA is now currently $0.0001074 per LUNC on CoinMarketCap as of the 20th of July 2022.
Terra as a platform was built with the intention of offering users the stability of fiat currencies while harnessing the power of blockchain technology for settlements that were faster and cheaper than regular payment solutions. LUNC was widely accepted because it was backed by its algorithmic stablecoin sister token which is known as the Terra Classic USD (UST). In December 2021, Terra overtook the BNB Chain to become the second largest DeFi protocol with more than $20 billion invested in the network across its applications. At some point, LUNA sold for over $100 until the May crash that shook the world of cryptocurrency, leaving many in heavy financial losses.
Terra is a Cosmos-based protocol that powers a group of algorithmic stablecoins which were designed to maintain their pegs with the LUNA token. One of these algorithmic stablecoins is UST, which maintained its peg to the US Dollar through a network of investors that buy LUND (formerly LUNA).
The way it works is that before you buy UST, you have to mint some LUNA. You pay the going rate in LUNA and the LUNA tokens are burnt. The supply of LUNA is reduced and the price goes up (with demand). On the other hand, if you want to mint LUNA, you convert UST coins. The stablecoins are burnt and the price of UST goes up.
The profits from the variation in prices of the LUNA and its sister token UST goes to the arbitrageurs on the Terra network. Apart from helping the maintain UST peg to the US dollar, Terra Luna serves the key function of being the payment method used for transaction fees in the Terra network's gas system.
In addition, LUNA could be staked for additional rewards. Apart from the profit that LUNA gave its holders, it enabled them to create and vote on different proposals with changes regarding the Terra protocol. LUNA also served as a regulatory mechanism for the demand of stablecoins that are pegged to the token.
LUNA Classic (LUNC) is the original Terra LUNA coin left behind after the recent UST/Luna collapse and the establishment of a new Terra chain. Kwon's plan for recovery included the creation of a whole new chain on which future transactions would be conducted. The old chain was split into the LUNA Classic and the Terra chains. Terra is the name of the new chain (known as LUNA 2.0), and LUNA Classic (LUNC) is the original Terra blockchain's native token.
The term 'classic' is most likely a reference to the hard fork of Ethereum and Ethereum Classic that occurred after Ethereum's 2017 decentralized automated organization (DAO) breach. This appears to be another ploy to promote the UST crash as 'Terra's DAO hack moment', as Kwon stated.
An algorithmic stablecoin is an asset that derives value through a set of rules rather than being tied to an asset, itself. This method enabled Terra users to invest in the price of these coins linked without needing to hold their physical counterparts.
However, the so-called stablecoin UST depegged on May 9th, after nearly 18 months of retaining its value against the US dollar. The uncoupling created a chain reaction that resulted in the crash of UST and the Terra (LUNA) cryptocurrency, as well as Bitcoin and the greater crypto sector, which has yet to recover fully.
Terra 2.0 is the most recent version of Terra (LUNA), which is what Do Kwon has devised as a regeneration strategy. The goal is to propose a fork of the Terra blockchain and an airdrop to crypto investors whom the recent market downturn has impacted. The main goal is to restore trust in this stablecoin through the Terra ecosystem's new venture.
Terra 2.0's policy occasionally issues additional LUNA tokens to crypto investors who purchased more than 10,000 LUNA before the catastrophic harm to this stablecoin. More than 300% of crypto investors' LUNA tokens will be unlocked at once, with the remaining 70% issued over two years. These crypto investors will receive the new Terra 2.0 tokens after six months.
Terra 2.0 uses a typical proof-of-stake (PoS) consensus mechanism to validate transactions. A total of 130 validators engage in network consensus at any given moment, with voting privileges determined by the quantity of LUNA 2.0 connected to each node. Gas fees and a 7% fixed yearly LUNA 2.0 inflation rate are used to produce rewards.
By delegating LUNA 2.0 tokens to a validator of their choice, LUNA 2.0 token holders participate in consensus. Validators, like delegates, frequently put up their own stake. Therefore, before awarding prizes to delegators, the validation node keeps a commission in this scheme.
The incentives generated by LUNA 2.0 delegators differ, depending on the voting power of the validators. That being said, those with more voting power naturally earn more rewards, but they must be dispersed among a wider pool of delegators.
Delegating can be done using the Terra Station interface, but be warned that it comes with a risk. For instance, validators can be penalized for misbehaving, resulting in staked LUNA 2.0 being sliced. Slashing can happen even if the validators are mistakenly turned off for a brief time.
Terra Luna Classic would crash again, although this time with less effect. The UST burn didn't prove to be completely effective in getting the token back to $1, so Do Kwon announced a new plan. Terra Luna would have a new version known as Terra Luna 2.0 (LUNA) while the old version would be known as Terra Luna Classic (LUNC). A LUNA airdrop would also be conducted to reward old holders. Terra Luna 2.0 launched on the 28th of May 2022 and recorded falls in price over the next few days. LUNA reached its peak at a price of $19.53 and subsequently collapsed to about $4.39 some hours later. In May, the price bounced back to $5.90 but with a consequent loss of trust in Terra Luna.
Terra Luna, as of June 2022, dropped significantly to $3.30 from a high of $4.50. According to a FX Street report, there were indications that the token could go as low as $1.20 if it printed a sustained four-hour candlestick close below the $3.30 level. This analysis was based on a Fibonacci retracement indicator. The analysis turned out to be close to the truth; on the 22nd of July 2022, the LUNA was valued at $1.93 per token on CoinMarketCap. This is a significant loss for a token that once sold for almost $20. Investors lost trust in the token and sold their airdrops, even at low rates. There were many speculations about the crash and fewer people were willing to put their money in LUNA and LUNC.
There are so many speculations about how Terra crashed, but one major speculation is that there were massive sellouts of UST. Going by that theory, in early May there were some large UST withdrawals on the Terra ecosystem. These withdrawals increased the supply and brought the price of UST down. As the price of UST lowered, investors panicked and began to sell. As UST was sold, LUNA was minted and the price of the token fell drastically. LUNA was constantly being produced to keep UST steady in price, but in the long run, both tokens crashed.
The Terra Luna crash shook the crypto industry: many lost their life savings and there were reports that some investors were suicidal and hiding from their friends whom they convinced to invest in LUNA. Investors saw their money move from thousands of dollars to a few cents in the space of a few days. LUNA had a value of over $40 billion, but today that value has been wiped out, along with its investors' trust. More than 2,000 investors filed a class action lawsuit against Do Kwon, and the US Securities and Exchange Commission (SEC) opened its own investigation into the matter. In South Korea, the investigation of Terra Luna's collapse is being led by a special financial crimes unit with the prosecutor's office in Seoul. Former employees of Terraform Labs in South Korea are banned from leaving the country during these investigations.
The Terra Luna crash was a defining moment in the world of cryptocurrency: it drove home the point that cryptocurrency in any form could always be volatile. Investors who believed in the ability of UST to remain pegged to the US dollar lost faith in UST and became more wary of Tether USDT. The suspicion that not all stablecoins are actually backed by reserves resulted in less trust for cryptocurrency stablecoins and tokens in general. Cryptocurrency critics had a field day, describing cryptocurrency as a Ponzi scheme in which investors had been played, not once, but twice with Terra Luna. The cryptocurrency industry as a whole suffered, losing investors and over $400 billion in value in terms of crypto market capitalization.