Aside from the spectacular crash of FTX, which we have also covered in length, another landmark crypto fall was Terra and its LUNA tokens. It was sudden, unexpected, and quick, and an arrest warrant was also issued for Do Kwon, the founder.
What caused the fall and what is happening to Terra now? Let’s find out.
Table of Contents
- What Happened to Terra Luna?
What is the Terra Ecosystem?
The Terra network is a blockchain-based platform that aims to build a global decentralized financial infrastructure, much like blockchain technology itself. It is based on the Terra blockchain protocol, which uses a novel algorithmic mechanism to ensure the price stability of its stablecoin (called UST), which is pegged to the US dollar.
What is a stablecoin? It is a type of cryptocurrency that is designed to hold a stable value usually tied to fiat currency, with the U.S. dollar being the most popular one. Stablecoins are viewed as a way to hedge against crypto volatility.
The native token on the Terra blockchain was LUNA tokens. People believed that stablecoins were, as the name suggests, stable. UST was relative to the U.S. dollar, which compared to other tokens such as ETH on Ethereum.
We can look at it like this:
- The Terra ecosystem was the platform
- UST was the blockchain’s stablecoin
- LUNA was the blockchain’s native token (like ETH on Ethereum and ADA on Cardano)
Terra had other applications available on its platform, which were:
- Anchor Protocol: A decentralized lending platform. Users could earn stable interest rates on their digital assets.
- Mirror Protocol: A decentralized platform to create and trade digital assets that mirror and track the price of real-world assets such as stocks, and various currencies.
- TerraSwap: A decentralized exchange for trading.
- Chai: A mobile payment app that supports UST and other cryptos.
Terra Luna Crash
UST was pegged to the value of LUNA, and UST uses an algorithmic stablecoin rather than the actual U.S. dollar to maintain its value. In order to ensure the future and long-term value of the LUNA token, creators at the Terra network made it so you had to burn LUNA to create UST.
It means, for example, you could trade a $50 LUNA token price for UST of the same value. What caused the spectacular crash of both LUNA tokens and UST was the fact that UST lost its peg to the USD. Because LUNA and UST were so closely linked, both suffered the consequences of the Terra Luna crash.
At the time, Terra Luna was a big part of the crypto market, so you can imagine the repercussions a crash of this magnitude had on the crypto exchanges and markets. Bitcoin’s value was affected and crypto world giants such as Celsius and Voyager had to file for bankruptcy.
Unsurprisingly, the crash also affected thousands of crypto investors from around the world as many UST and LUNA holders lost their life savings.
Terra Luna Rebirth
At the end of May 2022, Do Kwon launched Terra 2.0 a blockchain without ties to the algorithmic stablecoin. With this overhaul came renames. The first version of Terra became known as Terra Classic and the original LUNA token was renamed LUNA classic (LUNC).
The Terra LUNA classic token and the chain’s revamping were seen as a way to “fix” the Terra collapse. The new coin has a total locked supply of 1 billion and was split amongst previous and existing investors with 30% left in the community pool.
What is Happening Now?
The founder, Do Kwon, is still facing legal issues following what happened to Terra. In his native country of South Korea, Kwon is facing fraud and breaches of market law charges. Interpol has put out a Red Notice for the Terra founder’s arrest, but it is rumored that he is living in Serbia.
Do Kwon went into hiding and it has proven more difficult to extradite him compared to Sam Bankman-Fried, the founder of FTX. This is because there are disputes between prosecutors and Seoul courts about Kwon’s charges. On top of that, another issue is that South Korea and Serbia do not have an extradition agreement, something that Kwon seems to have taken advantage of.
Kwon claimed that although the failure of Terra and LUNA is his responsibility, it was not due to fraud. We will have to keep following the story as it unfolds.
Conclusion
With the collapse of both FTX and Terra Luna, crypto investors can learn a few things about keeping assets safe. Make sure to not keep your assets on an exchange. Use a custodial cold wallet, one that you have 100% control over that is offline, check out SecuX’s options here. It’s also important to understand the risks of investing. Choose stablecoins that are actually tied to the U.S. dollar.
Related Articles:
- Why Choose a Cold Wallet?
- What Happened to Cryptocurrency Exchange FTX?
- What Is a Crypto/NFT Wallet? – Your Questions Answered
Sources:
- https://www.forbes.com/sites/qai/2022/09/20/what-really-happened-to-luna-crypto/amp/
- https://hackernoon.com/what-happened-to-terra-luna
- https://corporatefinanceinstitute.com/resources/cryptocurrency/what-happened-to-terra/
- https://www.cryptopolitan.com/what-happened-to-terra-luna/
- https://www.coindesk.com/learn/the-fall-of-terra-a-timeline-of-the-meteoric-rise-and-crash-of-ust-and-luna/
