Terra Luna Classic (LUNC)
Terra is a blockchain platform that employs algorithmic stablecoins tied to fiat currencies to enable globally consistent payment systems, as outlined in its white paper[1]. Founded in 2018 by Do Kwon and Daniel Shin of Terraform Labs, Terra aimed to create a decentralized financial system using fiat-pegged stablecoins. The platform's most notable products were the TerraUSD (UST), an algorithmic stablecoin, and LUNA, a reserve asset cryptocurrency. However, the project's journey faced significant challenges, culminating in its bankruptcy filing in January 2024.
The rise and fall of TerraUSD and LUNA
| Ticker | LUNC |
| Category | Smart Contract Platform |
| Website | https://terra.money |
| @terra_money | |
| Telegram | TerraLunaChat |
| https://www.reddit.com/r/terraluna/ |
Terra's primary innovation was its algorithmic stablecoins, designed to maintain their value by being pegged to traditional currencies. TerraUSD (UST), pegged to the U.S. dollar, was a leading example, reaching the position of the third-largest stablecoin by market capitalization before its collapse. Unlike other stablecoins backed by actual U.S. dollars, UST maintained its peg through a "burn and mint equilibrium" model, where LUNA absorbed volatility.
In May 2022, Terra faced a catastrophic failure when UST lost its peg, leading to a market capitalization wipeout of nearly $45 billion in just a week. The collapse led to the temporary halting of the Terra blockchain and significantly impacted investor confidence.
Terra's ecosystem and associated projects
Terra's blockchain supported a robust ecosystem of decentralized applications (DApps) that leveraged its stablecoin infrastructure. Notable DApps included Anchor Protocol, which offered high-yield lending and borrowing services, and Mirror Protocol, which provided financial derivatives designed to mimic traditional stocks.
Anchor Protocol and its high-yield controversy
The Anchor Protocol was one of Terra's flagship projects, offering investors a 19.45% yield on UST deposits. While this attracted significant attention and investment, critics raised concerns about the sustainability of such high returns, likening it to a "Ponzi scheme." The protocol's reliance on Terra's reserves to pay yields was a critical point of contention.
Mirror Protocol and financial derivatives
Mirror Protocol focused on creating synthetic assets that mirrored the performance of traditional stocks. This innovation allowed users to trade and invest in stock-like assets directly on the blockchain, broadening Terra's appeal to investors familiar with traditional financial markets.
The role of Luna Foundation Guard
In January 2022, the Luna Foundation Guard (LFG) was established as a non-profit entity in Singapore, directed by Do Kwon. Its purpose was to stabilize UST prices by holding reserves, including 80,394 bitcoins valued at approximately $2.4 billion before UST's collapse. This reserve strategy was a crucial part of maintaining UST's peg, but ultimately proved insufficient during the crisis.
Terra's expansion and partnerships
Terra's growth strategy included high-profile partnerships, such as the sponsorship deal with the Washington Nationals Major League Baseball team. Announced in February 2022, this agreement involved stadium branding and renaming a club lounge to "Terra Club." The deal, valued at $38.15 million over five years, highlighted Terra's ambition to integrate blockchain technology into mainstream culture.
Ownership and corporate dynamics
Initially, Do Kwon and Daniel Shin co-owned Terraform Labs equally. However, Kwon later expanded his ownership to 91.7%, reducing Shin's stake to 8.3%. Despite claims of divestment from Terraform Labs, regulatory documents indicated Shin retained some ownership. This ownership dynamic underscored internal tensions as Terra navigated its turbulent journey.
The collapse
The May 2022 downfall of Terra (LUNA) ranks among the most dramatic and catastrophic occurrences in cryptocurrency history. Within a single day, the project saw its market value plummet by an astonishing $40 billion[2], leaving countless investors with significant losses. This startling event was the result of systemic weaknesses, market panic, and the reckless behavior of its founder, Do Kwon. Let’s explore the lesser-known aspects of Terra’s failure and the crucial lessons every crypto investor should heed.
Terra’s blockchain was created with the bold aim of transforming payments through an algorithmic stablecoin known as UST (TerraUSD). Unlike conventional stablecoins backed by reserves like US dollars or other assets, UST operated on an algorithmic system intertwined with Terra’s native token, LUNA.
The mechanism: The basic idea was straightforward: users could always swap 1 UST for $1 worth of LUNA. This design was intended to maintain UST’s peg to the US dollar, even amidst market volatility.
The system’s dependence on LUNA to uphold UST’s $1 peg was fundamentally flawed. In theory, if UST fell below $1, users could burn LUNA to create more UST, and vice versa, to stabilize the price[2]. However, this relationship between UST and LUNA set the stage for a perilous feedback loop that ultimately collapsed under pressure.
The collapse began in May 2022 following massive withdrawals from Anchor, a decentralized finance (DeFi) platform offering unsustainably high yields on UST deposits[2]. As users hurried to withdraw their money, UST’s value slipped below its $1 peg, sparking market panic.To stabilize UST, the algorithm produced more LUNA, leading to an oversupply of the token in the market. Consequently, LUNA’s price plummeted rapidly. The more LUNA was created, the more its value decreased.
As panic spread, UST’s value dropped to as low as $0.10, while LUNA’s supply skyrocketed[2]. LUNA’s price, which had been around $80 just weeks earlier, crashed to nearly zero, reaching just $0.0001 in days. This disastrous failure erased Terra’s $40 billion market cap, leaving many investors with huge losses.
Major cryptocurrency exchanges delisted LUNA and UST tokens as the project imploded, leaving investors with no options to recover their investments.
Do Kwon, Terra’s founder, had been a strong proponent of the project’s success. He made bold claims about Terra's potential to revolutionize finance and promised investors high returns. However, as the crash unfolded, Kwon’s confidence quickly turned into a desperate attempt to minimize the damage. He suggested a controversial blockchain fork, essentially proposing a new version of Terra to recover from the collapse. This plan was met with skepticism and failed to restore confidence in the project.
The fallout from Terra’s collapse was swift and severe. Lawsuits were launched against Do Kwon, and regulators from multiple countries began probing the events leading up to the crash. Allegations of market manipulation, fraud, and misleading statements from Kwon and his team became central to the legal battles surrounding Terra.
As Terra’s collapse sent shockwaves through the entire cryptocurrency industry, many investors who had placed their trust in the project felt deceived and victimized.
The saga took a dramatic turn in March 2023 when Do Kwon was apprehended in Montenegro. He had been evading authorities for months, facing charges related to his involvement in the Terra disaster. Kwon was eventually caught with a forged passport, marking a pivotal moment in the aftermath of Terra’s collapse.
Authorities worldwide had been closing in on Kwon, and his capture signaled that the crypto community would not allow such a massive failure to go unpunished.