Following the collapse of the Terra ecosystem in May 2022, the blockchain was rebranded and hard-forked into Terra 2.0. The LUNA Classic token was a part of that rebranding, as the renamed original LUNA leftover.
In turn, the hard-forked Terra 2.0’s native token carried on the original LUNA name. The question is, on what grounds does LUNC remain a viable digital asset for investing?
Prelude to LUNC Rebranding
Terra’s $60B failure was a nadir in blockchain history. Do Kwon, the co-founder of Terraform Labs, envisioned the Terra ecosystem as the blockchain equivalent to the Visa payment system with dApps and stablecoins in the mix.
Everything was supposed to happen on-chain — payments, savings, lending — the three pillars of personal finance. To be scalable for global crypto adoption, Kwon relied on the algorithmic stablecoin TerraUSD (UST), launched in September 2020. Thanks to the LUNA-UST duo, Terra evolved into a churning dApp ecosystem and it was deemed a potential “Ethereum killer.”
Working in tandem with Terra’s native LUNA cryptocurrency, UST was dynamically contracting and increasing its supply, based on market needs. To remain stable, UST was not over-collateralized like other decentralized stablecoins, such as Dai (DAI). Instead, UST relied on LUNA minting or burning.
If UST went over the one-to-one peg against the dollar, LUNA tokens were burned to mint UST in equal value. Because this increased UST supply, it brought down its value back to the USD peg. The same applied in the opposite direction.
An elegant and efficient solution to capture value, but with one huge problem: UST’s stability was tied to LUNA’s price, which is inherently a volatile cryptocurrency. Once LUNA went down, UST quickly followed.
Much of Terra’s wealth was concentrated in the Anchor lending protocol, which offered artificial, unsustainable, and Ponzi-like 20% stablecoin yields. In combination with investor drawdown from Anchor, and LUNA’s price wobble, the two pillars of the Terra ecosystem imploded, wiping out investors’ life savings.
In the same month, Do Kwon came up with a recovery plan and the LUNC token.
Terra’s Rebirth With LUNC Leftover
On May 28, Terraform Labs launched the new Terra blockchain as a hard fork of the old one. Blockchain hard forks happen when new protocol rules are different enough to cause previous transactions (data blocks) to be invalid.
With Terra’s validators agreeing with Kwon’s hard fork proposal, they enacted new network protocols. Because there was only a pool of 130 validators to begin with, that means that the old blockchain, “Terra Classic” was left with near-zero activity, including dApp development.
LUNA Airdrops to LUNC Token Holders
Airdrops are very flexible vehicles to market blockchain projects, create media hype and reinvigorate a stagnant protocol with new incentives. Typically, either the project team or the protocol’s foundation sends tokens to wallet addresses that have used the protocol or hold the project’s native tokens.
In the same manner, airdrops can be used to reimburse funds, or at least provide an opportunity for an imbursement. On May 28, Do Kwon’s revival proposal spawned Terra 2.0, creating LUNA tokens on a hard-forked chain, while the original LUNA were renamed LUNA Classic (LUNC).
This was the Genesis airdrop, delivering new LUNA tokens to Terra token holders across four categories:
- Pre-collapse LUNA investors were airdropped new LUNA tokens in a one-to-one ratio.
- Post-collapse LUNA investors were airdropped new LUNA tokens in a 1:0.000015 ratio.
- Pre-collapse UST investors were airdropped new LUNA tokens in a 1:0.033 ratio.
- Post-collapse UST investors were airdropped new LUNA tokens in a 1:0.013 ratio.
For example, a post-collapse UST holder who had 100 UST received 1.3 new LUNA tokens. The “pre” period relied on a holdings blockchain snapshot made on May 7, while the “post” period relied on a holdings snapshot made on May 27.
An extra stipulation of the Genesis airdrop was its delayed 21-day unlocking, dubbed as “bonded state.” Suffice to say, this caused a negative reaction because the price of tokens further plummeted in the meantime.
Moreover, the genesis airdrop did not properly deliver LUNA tokens due to technical issues. This resulted in the second Phoenix airdrop of new LUNA tokens. It passed with an overwhelming 99.99% majority, after 331M votes pushed it over the threshold.
The September Phoenix airdrop (proposal 986) patched up the Genesis airdrop with additional 19,504,909 new LUNA tokens to LUNC/UST holders who didn’t receive their fair reimbursement” the first time.
LUNA Classic (LUNC) Collapsed State
Since its rebranding from LUNA to LUNC, the cryptocurrency has been worth less than one-thousandth of a dollar. For comparison, LUNA was originally priced in Terra’s ICO sale in 2019 at $0.80, while it reached its ATH price in April 2022 at $119.
Yet, the same devaluation story is repeating with LUNC’s younger LUNA continuation within the new Terra 2.0 blockchain. Predictably, the new Terra iteration lacks any algorithmic stablecoin, as it presents a major vulnerability. Nonetheless, this downturn shifted after the V22 Terra Classic upgrade on Aug. 26, resulting in both LUNC and LUNA to rise.
As a part of the recovery plan, the V22 upgrade provides LUNC token holders an opportunity to recover some of the funds lost in May’s implosion. The update enabled 1.2% burn tax whenever LUNC tokens are burned to mint UST (also rebranded to USTC). Additionally, it re-enabled staking and delegating.
Is the Terra Ecosystem a Dead-End?
For all intents and purposes, LUNC has been transformed into a meme coin, just like its newer LUNA iteration. Just like other memecoins, it relies on exchange listings and social media engagement to exert positive valuation moves.
With that said, the lesson Terra delivered is powerful. One should not pour life savings into experimental financial platforms, especially ones that rely on algorithmic stablecoins. In a mature crypto ecosystem, they may work robustly, but not in an incipient ecosystem.
Moreover, if a 20% yield on deposits sounds too good to be true, it virtually always is.
This series article is intended for general guidance and information purposes only for beginners participating in cryptocurrencies and DeFi. The contents of this article are not to be construed as legal, business, investment, or tax advice. You should consult with your advisors for all legal, business, investment, and tax implications and advice. The Defiant is not responsible for any lost funds. Please use your best judgment and practice due diligence before interacting with smart contracts.