Terra

Terra (LUNA) is a blockchain protocol and payment platform created in 2018 by Terraform Labs, a startup co-founded by Do Kwon and Daniel Shin. The project aimed to develop a stablecoin, TerraUSD (UST), pegged to the US dollar, and a reserve asset cryptocurrency, LUNA. The Terra blockchain was launched in 2019, and LUNA was sold via an initial coin offering (ICO) to investors.

Terraform Labs raised over $200 million from investment firms such as Arrington Capital, Coinbase Ventures, Galaxy Digital, and Lightspeed Venture Partners. The Luna Foundation Guard (LFG) was established in January 2022 as a non-profit based in Singapore, with Do Kwon as director. LFG held reserves of 80,394 bitcoin worth approximately $2.4 billion to stabilize the price of UST.

Terra gained significant attention in the DeFi space, particularly with its Anchor savings platform offering 20% interest for UST holdings. This attracted large amounts of capital to UST. By December 2021, Terra had become the second-largest DeFi protocol with over $20 billion locked into it.

On May 7, 2022, UST briefly lost its peg to the US dollar, triggering a "death-spiral" where panicked depositors sold their UST, leading to a decline in the price of LUNA. Despite Terra deploying large amounts of capital to bid up the price of UST, the stablecoin collapsed in value to less than 20 cents. The price of LUNA fell 99.99% to effectively zero. The Terra blockchain was temporarily halted, and the project team was forced to admit defeat.

Following the collapse, a proposal was approved to reissue a new LUNA cryptocurrency and decouple from the devalued UST stablecoin. The original blockchain was renamed Terra Classic, and the original LUNA token was renamed LUNA Classic (LUNC). The new LUNA coin, known as Terra 2.0, was launched on May 28, 2022, with an airdrop to previous LUNA and UST holders.

Do Kwon, the founder of Terra, faced legal issues, including securities fraud, commodities fraud, wire fraud, and conspiracy charges. He was arrested in Montenegro in March 2023 while attempting to travel with false documents. Terraform Labs filed for Chapter 11 bankruptcy in the United States on January 21, 2024, listing assets and liabilities in the range of $100-$500 million.

Terra (LUNA) is a blockchain-based platform designed to provide a stable digital currency ecosystem. Here's an overview of how it works:

• LUNA Token: The native cryptocurrency of the Terra network, used for various purposes such as collateral, gas fees, staking, and governance.
• Terra Stablecoins: Algorithmic stablecoins pegged to traditional fiat currencies, like the U.S. dollar. The main stablecoin is TerraUSD (UST).

Terra uses the Delegated Proof-of-Stake (DPoS) consensus protocol, known as Tendermint. This mechanism allows LUNA token holders to delegate their tokens to certified validators, who are responsible for proposing new blocks, validating transactions, and maintaining the stability of the stablecoins. Validators are incentivized with rewards from transaction fees and voting power is weighted by the number of tokens delegated to them.

LUNA token holders can stake their tokens to participate in the validation process and earn rewards. They can also delegate their tokens to validators, who then use them to propose new blocks and vote on proposals for the growth of the platform. This staking mechanism helps maintain the stability of the stablecoins and allows token holders to participate in governance.

When a user processes a transaction on the Terra network, they need to pay a partial amount of LUNA tokens as a gas fee. This fee is distributed among validators who participate in the transaction processing. The validators use the Terra Core software to run full nodes, which validate transactions and blocks on the blockchain.

To mint Terra stablecoins, users burn LUNA tokens. A small amount of the burnt LUNA tokens is transferred to the community treasury, making the minting process profitable for the network. This mechanism helps maintain the stability of the stablecoins by absorbing volatility.

Terra was founded in 2018 by Do Kwon and Daniel Shin and launched its mainnet in 2019. The platform aimed to provide users with the stability of fiat currencies while leveraging blockchain technology for faster and cheaper settlements. The Terra Alliance, a group of e-commerce businesses, supports Terra adoption.

In May 2022, the Terra ecosystem experienced a significant collapse, leading to a loss of trust in algorithmic stablecoins. The collapse resulted in the creation of LUNA 2.0, which uses a typical proof-of-stake (PoS) consensus mechanism. Validators engage in network consensus, and rewards are generated through gas fees and a fixed yearly inflation rate.

Overall, Terra (LUNA) is designed to provide a stable digital currency ecosystem through its algorithmic stablecoins and Delegated Proof-of-Stake consensus mechanism.

Terra (LUNA) has several strengths that contribute to its potential and value:

1. Governance and Staking: LUNA is used for governance and staking within the Terra ecosystem. Validators use LUNA to secure the network and participate in voting on network updates.

2. Stablecoin Support: Terra's stablecoins, such as UST, are pegged to conventional currencies and offer fast, cheap, and easy transactions. This stability appeals to traders and users who want to avoid price volatility.

3. Decentralized Financial Institution: Terra operates as a fully digital, decentralized financial institution, allowing users to earn interest on assets, make payments, and invest in synthetic stocks.

4. Competitive Programmable Payments: Terra offers competitive programmable payments, logistics, and infrastructure designed to simplify Dapp and stablecoin development.

5. Strong Founding Team: Terra was co-founded by Daniel Shin and Do Kwon, both experienced professionals with backgrounds in e-commerce and computer science.

6. Notable Backers: Terra has received support from notable investors such as Arrington Capital, Lightspeed Venture Partners, and Pantera Capital.

These strengths have contributed to Terra's growth and popularity, making it an attractive option for investors and users.

Terra (LUNA) faces several risks that could impact its stability and the broader financial system. Key concerns include:

1. Algorithmic Stablecoin Risks: Terra's algorithmic stablecoin, UST, relies on a relationship with LUNA to maintain its peg. This setup is inherently fragile and has historically led to failures in other uncollateralized stablecoins.

2. Market Volatility: The crypto market is naturally volatile, which can cause UST to lose its peg. This volatility can be exacerbated by factors like Anchor protocol's high yields and the potential for competing borrowing protocols to drain liquidity from Anchor.

3. Anchor Protocol Risks: Anchor, a decentralized lending platform, pays high yields to depositors, which can lead to instability if borrowing demand does not match lending demand. This imbalance can cause UST to become unpegged.

4. UST Market Cap vs. LUNA Market Cap Ratio: If UST's market cap grows significantly faster than LUNA's, it can lead to a situation where UST is not fully backed by LUNA, potentially causing the peg to break.

5. Regulatory Risks: The collapse of Terra has led to increased calls for regulation in the crypto space, which could impact Terra's operations and the broader crypto ecosystem.

6. Systemic Risks: The Terra ecosystem's growth is seen as unsustainable by some experts, and its collapse could have far-reaching implications for the financial system.

These risks highlight the potential vulnerabilities in Terra's design and the need for careful monitoring and management to maintain stability.

• Do Kwon: Co-founder and CEO of Terraform Labs, the parent company of TerraUSD and Luna. He was arrested in Montenegro in March 2023 and faces charges in South Korea, Singapore, and the United States for violating securities laws and fraud.
• Daniel Shin: Co-founder of Terraform Labs, along with Do Kwon.