Terra Autopsy and Zombie Revival Plan

terra luna

Many moons ago, the bullish case for Terra was straightforward with buy-in from both institutional and retail investors. It quickly became the second largest DeFi ecosystem in terms of Total Value Locked with a good selection of dApps for a variety of use cases. The most important asset however was the chain’s native algorithmic stablecoin UST, backed by a burning mechanism using native utility token LUNA. 

Demand for UST increased rapidly, leapfrogging the market cap of many more established fiat-backed stablecoins like TUSD, GUSD and algo cousin DAI. Most of that demand came from the unusually high 20% APY rewarded to stakers of UST on Anchor Protocol. That’s orders of magnitude better than you’d get from a bank account, and as a result attracted vast amounts of cash earmarked for low-risk investments.

And there was a Lunar Eclipse of biblical proportions which will be remembered by crypto veterans for years to come.

Do Kwon’s Big Bet Gone Wrong

Terra’s Founder Do Kwon used to be the hero many crypto kids admired and even imitated, but all he is now is the boogeyman in the bedtime stories crypto parents tell their fiat-fearing children. Crypto Twitter has turned her back on The Kwon, only sharing clips and snippets of moments in past interviews when he was being insensitive, arrogant, smug, and brash. There are many of these clips. There’s even a new NFT collection dedicated to KwonBoi using one of his beloved catchphrases: have fun staying poor.

The amount of hatred is nothing new in crypto, or even TradFi (Bernie Madoff tramp stamps were never a good idea, so who are you really mad at?). However, what is happening now seems more intense than usual. That probably has to do with two things.

First, while most crypto veterans have seen the many tombstones littering the algo stablecoin graveyard, it appears that a vast amount of the capital that flowed into UST did not get the same tour. Many investors, both institutional and retail, were confident UST would indeed be stable and remain pegged to the US dollar. If anything, most of the concerns raised by Luna haters and lovers alike, was the unsustainable 20% yield generated on the Anchor Protocol. 

Indeed, UST was gaining steady traction and while the peg wobbled a few times, it largely remained in place. The problem with these things is that the situation is practically binary. Everything is fine, until it is suddenly in full Chernobyl mode. That brings us to point number 2 on the ‘Why I Stopped Loving Do’ list.

Just weeks before the UST collapse, Do publicly announced plans to buy $10bn worth of bitcoin with the intention to use it as a reserve asset. There are many reasons why this could in theory be a very good idea: bitcoin is a bearer-asset, it is fully decentralized, and it is not embedded in the TradFi system (USDT reserves include commercial paper for example).

What it also did, however, is put a target on UST. As we wrote in an earlier piece, it would only take a few Antarctic Blue Whales (largest whales in the world) to destabilize the UST peg, create a bank run, force the Luna Foundation Guard holding the reserves in BTC to sell aggressively, and then scoop up sats on the cheap. 

Well, it looks like Big Blue came for you, Do.

UST is dead. Luna’s price went sub-zero, got delisted and relisted by major exchanges, and its supply increased by 20 fold. All within just a couple of days really. Everything is fine, until it is suddenly not. Many millions went up in smoke. Both the cash parked in the ‘safe’ option on Anchor as well as money held in LUNA. People got angry, things were said. Do was even rumored to be under 24/7 security – not to keep him in the country, but to protect him from GenPop in the courtyard.

It is Alive!

So what do you do when your billion dollar blockchain gets smoked? We’ve all been there, and know exactly what to do. You say ‘fork it’ and go on. And that’s exactly what Terra did. Tweeting out loud relentlessly (don’t read the comments), Do said the Terra community was working hard on a fix and eventually landed on a proposal which set out the plans for a Terra 2.0 fork. The community voted in favor of the proposal and in the last week of May Terra 2 was a thing and Old Terra was not (Auntie Terra is Terry now).

It’s been predictably volatile for LUNA 2 on the market. It popped big time, then went way down as many UST bagholders got tired of carrying their useless sacks around and sold their airdropped LUNA 2, and then the price went back up again as speculators smelled opportunity. It won’t be for some time until we know if Terra 2 was a good idea or if it was the biggest dead cat bounce in history.

The idea for Terra 2 is to go on without UST – or any algo stablecoin for that matter. In theory the fork has a good chance since its developer community is strong and dedicated, operations on the network run smoothly, and the dApps were well designed too. But, without the 20% APY magnet attracting TVL, will it have the chance to regain some of its former glory? It won’t be easy. 

Usually a chain forks when an event happens that shouldn’t have – for example a hack or a critical smart contract bug. In the case of Terra, it was a sudden and complete loss of confidence. That is a lot harder to fork away. They say Terra will now be governed by the community, and not a centralized entity like Terraform Labs headed by Don Kwon. It might help.

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