Terra (LUNA) has been the talk of the crypto town lately. Let’s recap the Terra (LUNA) project and the recent twists and turns that have left a sour taste in many crypto investors. In addition, we will try to understand their last maneuver, since their community just authorized the burning of 11% of the total supply of Terra’s stablecoin, UST, to help the LUNA project avoid collapse.
UST and LUNA
First of all, what we need to remember is the relationship between UST and LUNA. They are both cryptocurrencies created by Terra, a project made by South-Korean developer Do Kwon.
One was made for the other, as UST work as stablecoins and LUNA acts as the “standard” crypto. As UST are pegged with fiat currency (US Dollars), their job was to keep the balance for LUNA, as its “sister” coin’s prices fluctuate in the market.
This seemed like a pretty good plan until “the incident”: a massive sell-out of UST was made on a Saturday night and, of course, the price crashed, impacting LUNA directly.
Terra project users were caught off guard, and they lost millions of dollars in the process.
Nevertheless, since Terra had created a decent community around itself and had not found the answers they seek, Do Kwon put forth a plan to try to revert the situation.
The idea was simple: get rid of UST – now, worth like 2 cents of a dollar – and just work with this new LUNA version.
In a practical way, the new coin would work as native crypto in the “re-launched” blockchain, leaving behind the UST concept with a kind of hard forking of the blockchain minus the stablecoin.
In a ‘not so easy way of distribution, Do Kwon explained that the users of “pre-attacked” LUNA with a sum of 10k or less would have 30% unblocked in the genesis block and 70% after 6 months.
UST users would also participate in the distribution, as pre-attack UST holders would have 10%, Post-attack LUNA holders 10% and Post-attack UST holders get 15%.
The idea was to make this airdrop and, consequently, bring back the interest in a project that once was something valuable to users.
This all seemed to be a good plan, but… this is not quite what happened.
Plan B (that must’ve been A)
History repeated itself, as the new LUNA crashed from U$ 19,5 on its launch to U$ 5,9.
Investors were expecting something around U$ 50 and now they were witnessing the crash again, with just new “glasses”.
At this point, it’s easy to understand the community’s frustrations, once they were the ones who recommended another plan to Do Kwon who, apparently, adopted it as a second step:
It finally was time to burn some coins.
Most of us already know what the act of burning crypto serves for. However, let’s rewind: burning coins is a means to achieve a liquidity goal.
By “burning” (or just “sending” the crypto to an unknown address, making them “disappear”), you take out of the circulation a part of the supply and help improve the liquidity of the asset once it’s now rarer.
Since the problem with LUNA has been devaluation and price decrease, it seemed like a pretty straightforward idea to the users but Kwon didn’t put it into practice at first.
It was actually brought up by some notorious personalities in the crypto world, such as Chanpeng Zhao, CEO of Binance, who already had criticized the decision of creating new LUNAs instead of just burning crypto.
With the significant decrease of the LUNA 2.0 value, now, burning seems to be the official Plan B, as the Community Pool officially voted for the burn of 1 billion UST stored in their pool and from the remaining cross-chain which is implemented on the Ethereum blockchain as incentives.
This is the equivalent of 11% of the total supply of the coin.
In their proposal, the Community wrote:
“Eliminating a significant chunk of the excess UST supply at once will alleviate much of the peg pressure on UST. This is advantageous relative to the slow burn rate and type of downstream effects that inflated on-chain swap spreads induce on the Terra economy over an extended period”.
Even though the proposal was passed by the majority of the community, the creator of Terra still does not believe that it’d make such a difference in the situation.
Kwon shared on his social media the address for burning, however, reinforced that he does not agree with this decision:
As the subject unfolds itself, crypto users and enthusiasts keep an eye on the developments of this situation.
As it happens with various “beginnings”, we are witnessing for the first time a big project like LUNA trying to survive an attempt to break it, swimming desperately not to drown.
Even though hacks and scams are somewhat common in the crypto world, this is the first significant time that we watch something “mysterious” like this happening.
And of course, this is not how we want to learn things, but whether we like it or not, it’s a pretty efficient way to test our solution-oriented skills as we navigate this amazing yet new world of blockchain and cryptocurrencies.
So, if you are feeling a little low about that news – even if you’re not a LUNA holder – try not to be: great problems may lead to great solutions. Now, more than ever, education and information are fundamental.