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Overview
One of the biggest implosions in the cryptocurrency space happened in May this year. Terra’s UST (UST-USD) algorithmic stablecoin lost its peg. UST was designed to be at a $1 value but crashed to $0.13. Terra’s governance token LUNA, now Luna Classic (LUNC-USD), also fell by 99.9%. The Terra crash caused shockwaves in the crypto space.
Early analysis of wallets on Terra pointed to a top wallet as one of the wallets whose actions pushed the price of Terra UST out of peg. The wallet was linked to Terra ecosystem’s chief developer, Terraform Labs. On-chain data showed that the said wallet swapped about 85 million UST for another stablecoin, the USDC. Terraform Labs also removed over 150 million UST from a liquidity pool on Curve, a lending platform. The price of UST fell immediately after these huge trades.
Terra founder, Do Kwon, has since been on the run, with recent reports of an issued arrest warrant by Interpol. It is rumoured that Do Kwon might have fled Singapore, his known base.
Unlike most other stablecoins which are backed by a USD reserve, UST’s dollar peg relies on an algorithm which mints or burns LUNA to keep the value of UST at $1.
Algorithmic coins, like UST don’t have to be backed by anything. The peg was achieved by adjusting the supply and demand of UST and the native coin, LUNA. This happened in a decentralized way since there was a protocol in the ecosystem that allowed $1 of LUNA to be exchanged for $1 of UST at all times.
If UST was trading below its peg, then investors could take their UST to this protocol and exchange it for $1 of LUNA. This UST is then burned, reducing the supply, and the process can be repeated until the prices are equal again.
However, this mechanism only worked as long as there was enough demand for LUNA and UST. As yields in UST began to fall, interest in LUNA fell, and when the price of LUNA began to collapse, UST soon followed.
Following the UST fiasco, authorities have since proposed bills to ban algorithmic stablecoins.
Rebirth of LUNA
A few days after the UST and LUNA crash, Do Kwon shared a plan to revive the Terra ecosystem. A fork proposal was opened to the Terra community. In the “rebirth” proposal, a new Layer-1 Terra blockchain, without the algorithmic stablecoin UST, and the renaming of “old” LUNA to LUNA Classic and “old” UST to UST Classic (USTC-USD) were proposed; the proposal has since been passed. LUNA 2.0 went live on May 28, 2022.
The new LUNA tokens were airdropped to the pre-implosion holders of “old” LUNA. The new LUNA token hit a high of $20 but tanked by as much as 75% just hours after launch. There is still much distrust of the Terra project and its founder.
The LUNC Army
LUNC has been gaining a strong following on crypto Twitter. Holders of the former LUNA token and new supporters, who joined in after the massive crash with hopes of a Shiba Inu (SHIB-USD) like run, have kept an impressive appearance on crypto Twitter with trending hashtags. The LUNC community tries as much as it can to distance itself from the founder and initial developers of the project; LUNC is now a community-led project.
LUNC Army, as the community is fondly called on Twitter, recently proposed a 1.2% tax burn to curb the high inflation rate in the ecosystem in an attempt to revive the LUNC token. The proposal has been passed and the 1.2% tax burn has been implemented on the network.
The LUNC community went steps further in urging cryptocurrency exchanges to implement the 1.2% tax burn, as most trades and volume happen on centralized exchanges (CEX). MEXC global exchange was one of the first exchanges to implement a LUNC fee-burning mechanism in place of the 1.2% tax burn which will be complicated to directly implement on a CEX. MEXC adjusted the spot trading fees for the LUNC-USDT trading pair to 1% and has since sent all fees to the official LUNC burn address.
After much persuasion by the LUNC community, Binance joined the list of CEX that announced a burn mechanism to reduce the supply of the token. In a Tweet on September 26, Binance said it would burn all trading fees on all LUNC spot and margin trades. The announcement caused a rally in LUNC price, moving up from $0.00018 to $0.00032 within a day. LUNC has since held a price above $0.00026.
In the first batch of the Binance burn, which included all trading fees from September 21 to October 1, Binance burned a total of 5,595,907,838.67 LUNC – equivalent to $1,863,213.47 USDT.
Is LUNC a Worthy Investment?
After the massive May implosion, LUNC remains a very risky asset. The implosion-induced distrust of the token and its ecosystem is still fresh in the minds of affected holders.
Lots of dApps have stopped building on the network. It will take more than a Twitter army to make the chain ever considered for serious dApp development again.
Despite its best efforts, LUNC remains a shell of its former self. At its peak, LUNA had a capitalization of $41 billion. Its algorithmic coin, UST, was competing head-to-head with the other large stablecoins and was being used regularly in Korea through a well-known payment app.
All that LUNA has to offer now is a tarnished history and a group of speculators that hope to unload their bags at higher prices. Real developers moved their projects to other cryptos long ago, and it’s very hard to see how LUNA will be able to compete with the numerous blockchains out there.
Takeaway
There are hundreds of interesting crypto projects out there; in my opinion, LUNC isn’t one at this point. It may be good for a trade, and I’m sure we will see more wild price swings in the future. However, I don’t see LUNC as a worthwhile long-term investment.