Terra Classic

What is Terra Classic (LUNC)?

Terra is a blockchain meant to encompass an entire ecosystem of fiat-pegged stablecoins to power a price-stable global payment and settlement system. The Terra Luna ecosystem reached a significant level of popularity within the industry in 2021, and Terra was one of the most active and popular blockchains.

However, the blockchain and its popular USD-pegged UST stablecoin collapsed in early 2022, sending shockwaves through the industry and bringing countless investors to their knees.

Following this “black swan” event, a revival plan was set into motion that would fork the chain into a new blockchain, often called Terra 2.0. The old blockchain is now referred to as Terra Classic, with its native token redenominated from LUNA to LUNC, meaning Luna Classic.

The UST stablecoin remains on Terra Classic with the likewise renamed ticker USTC.

What Happened to Terra Luna and UST?

One of the main reasons for Terra’s popularity was a decentralized application (dApp) called Anchor Protocol.

This DeFi dApp promised an industry-leading 20% interest on UST stablecoin deposits, which attracted funds from retail investors, lending companies, and yield-chasing hedge funds. So much so that up to 72% of the UST in circulation was deposited with Anchor.

Anchor would take deposits and loan them to borrowers in a manner quite similar to fractional reserve banking. However, it was unclear how Anchor could sustain such a high-interest rate.

Then, various analysts suggested that an unusually large series of transactions led to a de-peg of UST’s relationship to the US dollar and a “bank run” on the Anchor protocol.

Luna Foundation Guard (LFG) had previously accumulated $3.5 billion worth of Bitcoin to help back Terra’s algorithmic stablecoins. LFG had to sell a significant portion of this reserve at a loss in an attempt to buy and stabilize UST.

According to third-party auditors JS Held, LFG spent around $2.8 billion in BTC and almost $50 million in stablecoins to defend the UST peg. The firm behind Terra, Terraform Labs, also spent more than $600 million of its own capital in this regard. Whether this was a deliberate attack on Terra remains unproven, but Blackrock and Citadel Securities issued statements in the aftermath denying that they traded UST. However, according to Forbes, Blackrock had recently become the primary reserve manager for the cash reserves of a competing stablecoin, USDC. Citadel, which operates both a market maker and a hedge fund that trades US securities, had also recently begun to make inroads into crypto via an investment from crypto venture fund Paradigm. The firm also boasts a laundry list of fines from regulators, including a $97 million fine and a 5-year ban from operating in China. Citadel founder and CEO Kenneth Cordele Griffin was the top donor to right-wing politics in the US in 2022. He also became internet-famous by appearing before Congress in 2021, and his testimony, according to MarketWatch, gave rise to the trending Twitter hashtag “#kengriffinlied.”

Who are the Founders of Terra Classic?

Terra is a product of Terraform Labs, founded in early 2018 by Do Kwon and Daniel Shin. Do Kwon was the CEO of Terraform Labs and the face of the project, often courting controversy with his social media posts.

Terraform Labs also created the Luna Foundation Guard, introducing an asset reserve to help support its algorithmic stablecoins. LFG was funded by donations from Terraform Labs.

Daniel Shin co-founded and headed Ticket Monster, or TMON, prior to Terra. He also co-founded Fast Track Asia, a popular startup incubator.

Following the collapse of Terra, Kwon deployed the revival plan titled “Terra Ecosystem Revival Plan 2,” which forked the ecosystem into two blockchains, Terra Classic and Terra 2.0.

On September 15, 2022, a court in South Korea issued an arrest warrant for Kwon, accusing him and five others of violating local market laws. However, a request for an arrest warrant against Shin was dismissed by the courts in early December 2022.

According to South Korean prosecutors, Kwon is currently hiding in Serbia, having made his way there via Dubai from his Singapore residence.

How Does Terra Classic Work?

Terra is meant to be an ecosystem based around algorithmic stablecoins, the foremost being USTC (previously known as UST).

As a permissionless blockchain, Terra is accessible to anyone around the world, requiring only a computer with an internet connection. With either UST or LUNC (then known as LUNA) in a Terra wallet, users could perform transactions or interact with various decentralized applications.

Anchor Protocol was one of the most popular dApps on Terra. Still, the ecosystem was developing fast and played host to a significant number of both complete and in-development projects.

USTC was designed to be convertible at a 1:1 ratio to a dollar’s worth of LUNC, allowing arbitrage traders to redeem USTC for LUNC when USTC is discounted. When Terra collapsed, this led to hyperinflation of LUNC, as these traders picked up USTC, burned it, minted LUNC, and dumped that LUNC on the market.

Since the collapse, proposals have been implemented to burn a portion of the Terra Classic transaction fees and increase validator rewards. While the USTC cryptocurrency remains on the chain, it remains far from anything resembling an actual stablecoin, trading at just a few cents.

While there are rumors of developers working on Terra Classic, it remains fully in the hands of its validators now following its abandonment by Terraform Labs.

What Makes Terra Classic Unique?

Terra Classic is unique in that it is a cautionary tale. One may point to in future years as the final nail in the coffin for 2021’s crypto bull run.

According to some analysts, Terra’s collapse is the most costly crisis to have hit the cryptocurrency industry, causing upwards of $20 billion in realized losses for digital assets.

Investors chasing the highest available yields were shocked by sudden market moves that appeared to have been the actions of a very well-capitalized entity seeing and seizing an opportunity.

Among these investors were the hedge fund Three Arrows Capital (3AC) and cryptocurrency lender Celcius.

3AC, whose founders Kyle Davies and Su Zhu aren’t cooperating with liquidation procedures and are dodging extradition, had made leveraged bets on various cryptocurrencies, including LUNC.

The failure of 3AC was catastrophic because it turned out that lenders like Voyager Digital, Celsius, and BlockFi were overexposed to 3AC. Celsius also had $500 million in client deposits tied up in Anchor Protocol when Terra went down.

How is the Terra Classic Network Secured?

Terra Classic is a proof-of-stake blockchain based on Tendermint since it was designed using the Cosmos SDK.

In Terra Classic, LUNC token holders can delegate their tokens to validators, who produce blocks and validate transactions. These validators receive rewards in proportion to how many LUNC tokens they have staked and pass a pre-agreed portion of their rewards to delegators.

Validators that chose to continue supporting Terra Classic are now in control of the network and can vote on proposals put forward by the community.

What is the Use of LUNC?

LUNC is the native token of the Terra Classic blockchain, and its primary use is staking to secure the network. Stakers and validators are rewarded with more LUNC, which is a significant factor since LUNC was subject to hyperinflation and is now subject to a gradual supply reduction.

LUNC can also be used to pay for transactions and smart contract calls on the Terra Classic blockchain.

How Much LUNC is In Circulation?

LUNC currently has a circulating supply of almost $6 trillion. The Terra Classic community and the blockchain validators burn a proportion of transaction fees, but this may not be a significant amount since actual on-chain activity remains low.

How Do You Buy LUNC?

Much of the trading volume of LUNC tends to be found on centralized exchange platforms, and LUNC continues to be listed on several of them.

If you want to buy LUNC, you can do so with various stablecoins, such as USDT. It’s also possible to buy LUNC on various decentralized exchange platforms, but they may suffer from low liquidity.

How Do You Store LUNC?

There are several wallets that support LUNC, and the native wallet for the Terra ecosystem is the Terra Station wallet, which connects easily to all dApps on Terra Classic.

You can also store LUNC on a centralized exchange, but it’s possible that you may not be offered the same returns when trying to stake LUNC. For example, a non-custodial wallet like Terra Station will allow you to stake on-chain directly to validators of your choice.

Is LUNC a Good Investment?

It’s very difficult to make the case that LUNC is a good investment, even if more stakeholders in the ecosystem get on board with burning fees.

The hyperinflated supply of the coin isn’t just a danger by its nature but also because validators have picked up a significant amount of the currency through staking rewards. This creates a significant element of peril for new investors.

While it’s possible that the “Lunatic” community may be able to make something of the chain, the likelihood of that outcome remains to be seen.