Terra is an open-source blockchain protocol that has been created on the basis of its old version also known as Terra Classic. Initially launched in April 2019, the blockchain relies on the Terndermint protocol. The system was initially fueled by two tokens: an algorithmic stablecoin TerraUSD (UST) and Luna (LUNA). However, UST experienced a big price deviation as its value dropped from $1 to $0.01 over the course of 2021-2022. As a result, the platform had to pass through a hard fork so as to reimburse investors’ losses. At the time of writing, Terra 2.0 is powered by LUNA tokens while the old one features Terra Luna Classic (LUNC).
Terra Luna was initially invented by Korean blockchain enthusiasts Do Kwon and Daniel Shin from Terraform Labs in 2018. The initial goal was to create an algorithmic stablecoin that would be pegged to the price of fiat currencies such as USD, EUR, and South Korean won. Unlike fiat-collateralized stablecoins, algorithmic ones are backed by digital assets which, in turn, rely on various algorithms to help them preserve a stable value.
In the case of Terra, its stablecoin UST is backed by its sister token LUNA. In order to maintain stability, when a UST is minted, $1 worth of LUNA is burnt and vice versa. Whenever the price of UST deviates from the $1 threshold, arbitrage traders buy or sell their holdings for profit and thus help to maintain the system in a stable state. Such an approach helps the assets to become truly decentralized as they no longer depend on the issuing company and cannot be subject to any external influence. At the same time, their stable price makes them more usable for daily transactions.
However, the system has not proved to be flawless. In May 2022, a large amount of UST was dumped causing the de-pegging process. The crash occurred because of a successful hacking attempt that drained the Solana bridge Wormhole by 80k ether. With LUNA making up a significant part of the Wormhole’s reserves, the project was inevitably influenced by this breach. Due to the mass panic on the market, more UST coins were sold and more LUNA were minted. As a result, the circulating supply of LUNA spiked while its price was dumped. Arbitrage traders were simply unable to hold back such a massive price deviation.
The event had a further effect on other blockchain projects, especially those that were based on Terra blockchain. Thus, the stablecoin USDX created by Kava Labs was hit particularly hard. It was partially collateralized by UST which made its price drop down to $0.45 per coin. In addition, the collapse made a massive blow to the reputations of Terra founders.
Terra Luna released a revival plan which implied the creation of a hard fork. The governance proposal 1623 was issued on May 25th outlining the key aspects of the new protocol. Having quickly received approval from its community, the project brought this plan to life. Thus, on May 28th, 2022, a new LUNA token was released while the old one got the name of Terra Luna Classic (LUNC). According to Terra’s official Twitter post, new tokens should be distributed via airdrop to UST and LUNA holders starting from the first block of the new Terra chain.
As the new version represents an attempt to save the old system, it doesn’t offer anything new in terms of functionality. Just like the old Terra, the new one relies on Cosmos SDK and provides developers with a platform for smart contract creation. The solution features a robust library of materials for developers including many guides on CosmWasm smart contracts. It’s worth adding that the old version doesn’t simply disappear, though, as these two are able to co-exist. Luna Classic continues to operate in the same mode as it had been doing before the crisis.
While Terra relies on the proof-of-stake consensus mechanism, it also charges a small network fee for every transaction. Block validators are able to specify their own minimum gas fees. However, unlike systems based on PoW (proof-of-work), Terra defines the order of transactions with respect to the order received rather than to the amount of gas paid.
LUNA airdrop distribution
As mentioned earlier, a big portion of the new LUNA tokens has been released via an airdrop. At genesis, the initial supply included 1 billion tokens that were distributed as follows. Community pool received 30%, pre-depeg LUNA holders got 35% via an airdrop, pre-depeg aUST holders received 10%, while post-attack LUNA and UST holders got 10% and 15% correspondingly. At the same time, many users of Terra Classic blockchain became subject to vesting, which means that the tokens they received got locked for a specific period of time. Users could neither trade nor send them to other wallets.
Terra Luna team and partners
As mentioned above, the two founders of Terraform Labs are Korean entrepreneurs Daniel Shin and Do Kwon. Before launching Terra, Shin headed another IT project Ticket Monster, known as TMON. Also, he participated in the creation of a startup incubator Fast Track Asia. As for Kwon, he has another successful project behind his shoulders, too. At this, he was the founder and CEO of Anyfi, a peer-to-peer communication platform relying on mesh network technology. In addition, he worked as a software engineer at Apple and Microsoft.
As for the partners, Terra Luna has managed to onboard many enterprise-level customers throughout its existence. The list includes many non-profit organizations, schools, communities, and local governments.