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Terra, what happened and what next?

06 Jun 2022 By : Divya Behl
Southeast Asia’s Lar

Terra(LUNA) has seen one of the biggest pumps in the previous bull market, where it pumped from $0.07 to $120, making investors rich beyond their wildest imaginations. The whole Terra ecosystem was booming especially the LUNA coin, Anchor(ANC), and Terra USD(UST).

With the advent of new era protocols such as the DeFi evading the normal protocols in the long term of the evasion with the surge of new comprehensive accomplish it just goes to prove that it sustains with the new surge of the system and goes on with the new accords and triads in which the economic sector wishes to move and go. Even if these are accomplished by sustaining new protocols in the system it only goes to show that we can rise above the centralized regimes of government and can really boost up on the game where it's more delving on to the path of the crypto journey in the future.

In a short time, the Anchor protocol(ANC) became the biggest DeFi protocol in the crypto world in terms of market capitalization. On the other hand, UST became one of the top stable coins. All seemed good and green for the Terra ecosystem until UST de-pegged from USD. 

UST and Terra correlation

The Terra ecosystem relies on UST as a liquidity provider, and for trading fees, it was essentially the fuel of the ecosystem. The Terra crash started from UST.

UST is an algorithmic stable coin; this means many computers automatically work on predetermined algorithms to keep the stablecoin price at $1. The algorithm, in this case, was to burn $1 worth of LUNA for every UST minted and vice versa. 

While selling a coin against a stablecoin, Users are essentially buying the stablecoin, which means the demand for that coin will increase and hence pushing the price up; no platform can afford that since a stablecoin has to maintain a $ peg. Different blockchain ecosystems have different ways to counter this problem. 

In simple terms, Terra's burn and the mint algorithm were used to burn UST by increasing the supply of LUNA and burn Luna by buying back UST through Luna if the demand decreased. This algorithm gave LUNA a chance to be one of the fastest recoverers in the event of a sudden dump, no matter how choppy the market is. Pretty sleek, right, but this algorithmic stable coin was the biggest reason why Terra crashed. 

The Terra debacle

To attract users to the ecosystem where traders will buy Luna to create UST, Terra offered a 19.5 % yield for staking, which is essentially getting an interest of 19.5%. This was offered by a DeFi protocol known as Anchor (ticker: ANC). Instead of putting your savings in banks that offer single-digit interests, Terra offered its users nearly 20% for the same. At its peak, 70% of UST's circulating supply, which is around $14 Billion, was deposited in this project. Terra founder Do Kwon founded Luna Foundation Guard(LFG), which are the reserves that support the Terra ecosystem. 

On May 7, UST went downhill when more than $2 billion worth of UST was unstaked out of Anchor Protocol, and hundreds of millions worth of LUNA were instantly sold. While there are many theories why this happened, maybe it was because of the volatility period or FUD; this affected the whole market. 

The de peg created heavy panic when UST fell from $1 to $0.76; this, in turn, led to a wave of retail sellers who dumped all the Terra ecosystem coins. LUNA's all-time high is around $120, and it fell to $0.000000999967. Anchor, on the other hand, fell from $6.1 to $0.017 and UST to $0.02.

This debacle was a considerable setback for Terra; billions were wiped out of the market because of this, and hundreds of billions were further lost in the coming days, directly or indirectly caused by Terra.  

If this disaster would have been caused by a malevolent group of attackers, they would have created a substantial position that would have caused $2 Billion worth of UST to unstake, triggering the attack. But this is still speculation since it is not clear yet if this was an attack on the ecosystem or a series of very unfortunate coincidences. 

Terra, what next:

In the past few years, Terra has changed the lives of its investors; even after this disaster, the community is surprisingly still behind the project. The Terra community has voted on a revival plan that seems to be the best path forward. 

Terra CEO Do Kwon unveiled a grand plan that includes a new chain for future transactions. Hence, the Terra blockchain split into Luna Classic and Terra Classic chains. The Luna Classic will be the old chain, while the Terra Classic will be the new chain where all the transactions will happen. 

The term 'Classic' is probably a reference to the Ethereum Classic fork after the 2017 Ethereum DAO attack. The Luna 2.0 airdrop will be distributed as follow:

Allocation distribution of Luna 2.0's 1 Billion supply:

  • Pre-attack Luna holders: 35%

  • Post-attack Luna holders: 10%

  • Pre-attack aUST holders: 10%

  • Post-attack UST holders: 15%

  • Community Pool: 30% (with 10% for developers) controlled by Luna stakers.

Terra has admitted to facing a few hiccups during distribution, but investors remain hopeful about the future of Terra. It will be a long way for Terra to reach the heights it was at one time.  

The timing of this attack could not be worse for the Terra ecosystem since the Coinbase was near and now has probably been postponed indefinitely. 

Conclusion

The Terra ecosystem was one of the biggest systems out there; it was heavily intertwined with the market ever since Do Kwon and the LFG bought $3 Billion worth of BTC. The UST de peg has raised several concerns by regulators all around the world; every ecosystem with an algorithmic stablecoin is under heavy speculation. 

While the market is not forgiving, it is full of second chances; the present seems to be uncertain, but the community remains optimistic. These might not show the future growth of the company but definitely could cause mass to debunk at once if one remains to show the courtesy, towards it.


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