Terra
Terra is a blockchain protocol and payment platform used for algorithmic stablecoins. The blockchain project was created in 2018 by Terraform Labs, a startup co-founded by Do Kwon and Daniel Shin. It is most known for its Terra stablecoin and the associated Luna reserve asset cryptocurrency. [1][2]
In May 2022, a temporary halt of the Terra blockchain occurred when the algorithmic stablecoins TerraUSD (UST) and Luna experienced a significant decline, resulting in a loss of nearly $45 billion in market capitalization over the course of a week and causing hundreds of billions in losses in the larger crypto market. [13]
Overview
Terra is a blockchain platform that utilizes fiat-pegged stablecoins for its payment system and employs a proof-of-stake consensus mechanism. Among the stablecoins on the Terra protocol was TerraUSD (UST), which held a significant market capitalization before experiencing a collapse in May 2022. The Terra blockchain supports a range of decentralized applications (DApps), including Anchor, Mirror, and Pylon, which make use of its stablecoin infrastructure. [2][14][15]
Terra encompasses a group of algorithmic stablecoins, pegged to a specific currency such as the U.S. dollar (e.g., TerraUSD or UST). Luna acts as the primary asset supporting the Terra ecosystem and serves as a governance token for users participating in community proposals. Notably, UST stablecoins were not backed by U.S. dollars instead, it was designed to maintain its peg through a complex model called a "burn and mint equilibrium". This method uses a two-token system, whereby one token (UST) aimed to maintain stability, while the other token (LUNA) absorbed volatility within the system. [16]
The Anchor Protocol functioned as a lending and borrowing protocol developed on the Terra chain. By depositing UST into the Anchor Protocol, investors received a yield of 19.45%, which was sourced from Terra's reserves. The high-yielding nature of the Anchor Protocol prompted certain critics to express concerns regarding the stability of Kwon's stablecoin model, drawing comparisons to a "large-scale Ponzi scheme." [17]
Mirror Protocol, also situated on the Terra chain, was a project that developed and provided financial derivatives that aimed to replicate or "mirror" real-world listed stocks. [18]
History
Terraform Labs was founded in Seoul, South Korea in 2018 by Do Kwon and Daniel Shin. In 2019, the company launched its initial cryptocurrency token; Luna. Notably, Terraform Labs successfully secured over $200 million in funding from prominent investment firms, including Arrington Capital, Coinbase Ventures, Galaxy Digital, and Lightspeed Venture Partners. [2][19]
In January 2022, the Luna Foundation Guard (LFG) was established as a non-profit organization headquartered in Singapore, with Do Kwon assuming the role of director. Terraform Labs allocated a portion of the proceeds from UST sales to the Luna Foundation Guard, which served as reserves aimed at maintaining the stability of UST's price. As of May 7th, 2022, prior to UST deviating from its peg, LFG held reserves of approximately $2.4 billion, primarily consisting of 80,394 bitcoins. While Bitcoin constituted the largest portion of the reserve assets, LFG also maintained reserves in various other stablecoins and cryptos. [20]
In February 2022, Terra and the Washington Nationals, a Major League Baseball team, jointly disclosed a sponsorship agreement encompassing stadium and television branding. Additionally, as part of the agreement, the Washington Nationals Club and lounge were rebranded as the "Terra Club." Initially presented to the Terra community by Kwon, the proposal referenced an unnamed "sports franchise in one of the four major American professional sports leagues." Subsequently, the community consented to an exclusive partnership worth $38.15 million over a five-year duration. [21]
Founders Do Kwon and Daniel Shin each owned one share of Terraform Labs, giving each founder 50% of the controlling power. Kwon later enlarged his stock pool to eleven shares, giving him approximately 91.7% ownership and Shin the remaining 8.3%. Shin and Chai Corporation, a Terra-ecosystem payment service company that he founded, announced on 18 May 2022 that Shin no longer held any ownership stock in Terraform Labs. [22]
However, after it was revealed from sources of the Singaporean Account and Corporate Regulatory Authority that Shin still held 8.3% of Terraform Labs ownership, Chai Corporation announced that Shin was not able to "finish liquidating his remaining ownership in time" despite having the same share of ownership as of 18 May 2022. The documents from the Singaporean authority also revealed that as of 18 May 2022, Shin held 51.2% of ownership and Kwon 22.4% of Chai Holdings, the parent company of Chai Corporation. [23][24]
Terra Luna (LUNC) Collapse
On May 7th, 2022, the price of TerraUSD (UST), the algorithmic stablecoin of the Terra network, dropped to $0.91 after $2 billion of UST was unstaked and liquidated, causing a decrease in its value from $1. This resulted in traders exchanging 90 cents worth of UST for $1 of Luna. The reason for the sudden unstaking of the $2 billion worth of UST is unknown. After a large amount of UST was dumped, the stablecoin started to depeg. [13][25]
Investors also sold their UST once the stablecoin couldn't retain its peg. The price bounced between 30 cents and 50 cents in the week following the initial depeg, which then eventually fell to a steady low of under 20 cents. Its market cap, which was around $18 billion in early May, fell to $770 million by the end of May. [26]
This event led to an increase in the circulating supply of Luna from 345 million Luna to 3.47 billion Luna on May 12, 2022, which caused its eventual delisting from crypto exchanges, making it worthless. [13]
Luna Crypto Crash: The Aftermath
Following the crash, several crypto exchanges such as Binance delisted Luna and UST pairings. Trading suspensions were also prevalent in the lead-up to the weekend. A Luna Coinbase listing, previously set for launch by the end of June, was also quietly pulled.[25]
Do Kwon, CEO of Terra Luna, published a recovery plan for Luna, which had a temporary effect on the overall sentiment. Luna briefly rose to $4.46, before dropping below the $1 mark once again. It has since plummeted below 1 cent. Luna was abandoned after the drop, with Terra launching a new chain and new coin - Luna 2.0. The old Luna was rebranded as Terra Classic known as LUNC. [27]
Luna 2.0
On 28 May 2022, following the Luna crypto crash, Terra 2.0, a new form of the blockchain and the LUNA cryptocurrency, was launched. The new form of LUNA, which sees its original version rebranded as terra classic (LUNC), was airdropped to holders. [28]
Airdrop Distribution
The Luna 2.0 airdrop's primary purpose was to compensate people who held the original version of the coin before it crashed on May 7, 2022. The eligibility of LUNA rewards was based on the types of tokens held on the Terra Classic chain, the length of time the tokens were held (based on Pre-Attack and Post-Attack snapshots), and the number of tokens held. [40]
The Genesis airdrop took place on May 27th, 2022. The LUNA supply of 1 billion tokens was allocated according to the following distribution:
Community pool allocation: 30% (300 million)
- Controlled by staked governance.
- 10% earmarked for developers.
Pre-attack LUNA holders airdrop: 35% (350 million)
- Including bonded, unbonding, and staking derivatives.
- For wallets with less than 10k Luna: 30% unlocked at genesis; 70% vested over 2 years with 6-month cliff.
- For wallets with less than 1 million Luna: 1-year cliff, 2-year vesting thereafter.
- For wallets with more than 1 million Luna: 1-year cliff, 4-year vesting thereafter.
Pre-attack UST holders airdrop: 10% (100 million)
- 500K whale cap - covers up to 99.7% of all holders, but only 26.72% of aUST.
- 30% unlocked at genesis; 70% vested over 2 years thereafter with a 6-month cliff.
Post-attack LUNA holders airdrop: 10% (100 million)
- Including bonded, unbonding, and staking derivatives.
- 30% unlocked at genesis; 70% vested over 2 years thereafter with a 6-month cliff.
Post-attack UST holders airdrop: 15% (150 million)
- 30% unlocked at genesis; 70% vested over 2 years thereafter with a 6-month cliff. [41]
Tokenomics
When the supply of LUNA exceeds 1 billion, the protocol initiates a mechanism to burn LUNA tokens until the supply returns to the equilibrium level. Additionally, the protocol mints new LUNA tokens according to its algorithm to maintain the stability of Terra stablecoins' price. [42]
LUNA was first made available for purchase in a private token sale in August 2018 for initial investors, which included major exchanges such as Binance, and OKX, and raised Terra $32 million. [42]
Of the 385 million LUNA minted for the sale, 10% was reserved for Terraform Labs, 20% for employees and project contributors, 20% for the Terra Alliance, 20% for price stability reserves, 26% for project backers, and 4% for genesis liquidity. [42]
LUNA Utility
- LUNA is used to mine Terra transactions through staking.
- It is used to ensure the price stability of Terra stablecoins.
- It is used to provide incentives for the platform’s blockchain validators.
- LUNA is used to provide collateral for the purpose of stabilizing the price of Terra-based stablecoin. [10]
Terra Technology
The Terra protocol operates on a Proof-of-Stake (PoS) blockchain, where miners are required to stake their Luna tokens to participate in transaction mining. In this system, a Validator with a larger stake of Luna has a greater likelihood of generating the subsequent Terra block compared to a Validator with a smaller stake. In essence, Luna serves as a representation of a validator's mining power. [7]
Terra seigniorage
Seigniorage is the difference between the cost of issuing an asset and the asset's worth at face value. It is defined as seigniorage = new minted currency - cost of acquiring collateral. For Terra, every time a stablecoin is algorithmically issued due to demand, the platform profits. It places the profits in the Terra seigniorage pool to fund projects in the Terra ecosystem and reward Terra users. [38]
Regulatory Issues
In 2021, The U.S. Securities and Exchange Commission (SEC) issued a subpoena to Terraform Labs and Do Kwon with specific regard to Terraform Labs' Mirror Protocol, which designed and offered financial derivatives that virtually "mirrored" actual listed stocks. Kwon responded by stating that he wouldn't comply with the demands and instead would be suing the SEC. [30]
Despite Kwon's attempts to dispute and avoid investigations from the SEC, a U.S. Court hearing in Manhattan in February 2022 ruled in favor of the SEC's right to continue its investigation into Kwon and Terraform Labs. [31]
On 18 May 2022, the Korean Minister of Justice, Han Dong-hoon, enlarged the economic crimes investigation division of the Seoul Southern District Prosecutor's Office, vowing to "track illegal funds and capital transfers, crack down on tax evasion, audit company finances, compile transaction data, and seize the proceeds of criminal financial activity." On its first day of operation, the Financial and Securities Crimes Joint Investigation Team singled out the Luna and Terra crisis as its first investigation target. [32][33][34]
In June 2022, it was reported that 15 people, including former Terraform developers for the Anchor lending protocol, had been imposed with travel restrictions by the Korean government. [35]
In September 2022, a $56.9 million class action was filed at the High Court of Singapore against Do Kwon, Terraform Labs, Nikolaos Alexandros Platias, and the Luna Foundation Guard. The $56.9 million sum which the claimants were seeking is the difference in value between the sum in US dollars they believed their assets were worth and the value of their assets after the crash. [29]
On November 29, 2022, an arrest warrant was issued for Daniel Shin by South Korean prosecutors for allegedly gaining illegal profits before the massive collapse of Terra blockchain. Charges were also made against Shin for violating the Electronic Financial Transaction Act, as the customer information and funds of fintech firm Chai Corp. were allegedly used to promote Luna, prosecutors said. [36]
In February 2023, the SEC sued Do Kwon and Terraform Labs for fraud. The SEC alleges that Kwon marketed the assets, “repeatedly claiming” the tokens would increase in value. [37]
“Today’s action not only holds the defendants accountable for their roles in Terra’s collapse, which devastated both retail and institutional investors and sent shock waves through the crypto markets, but once again highlights that we look to the economic realities of an offering, not the labels put on it,” - SEC enforcement director Gurbir Grewal said in a statement.
Terra Governance
Governance in the Terra network allows participants to collectively demonstrate consensus support for proposals, enabling changes to be implemented through voting. It is a critical aspect of DeFi-focused protocols, including Terra, where proposals from the community require an initial deposit. [12]
Station
On January 14, 2023, Terra launched Station, an interchain wallet designed to streamline the process of interacting with multiple blockchain networks, which can often be complex and cumbersome. By utilizing Station, users gain the ability to effortlessly stake, vote, send, receive tokens, and engage with their preferred decentralized applications (dApps) on all supported chains. [39]
Interchain Governance
The Governance hub on Station provides users with a centralized location to access and vote on proposals across all supported chains. This feature enhances user efficiency by eliminating the necessity to switch between multiple interfaces or platforms in order to stay informed about proposals across different networks. [39]
The Governance hub on Station has four tabs — Voting to display proposals that are live in a voting period, Deposit for proposals that are currently in the deposit period and not yet live for voting, Passed for proposals that have received enough support from the relevant community to have been approved, and Rejected for proposals that have not received enough support and have been rejected by the relevant community. [39]
