The new Terra blockchain and Luna2.0 were designed to help Terra and its investors recover from the severe losses caused by the LUNA/UST crisis.
Since the devastating collapse of the cryptocurrency and its stable coin in May 2022, LUNA/UST, Terraform Labs, and its founder Do Kwon have been in the news. The value of these two cryptocurrencies nearly vanished entirely, resulting in a flood of criticism from the Terra community and the larger crypto world.
Do Kwon, CEO of Terraform Labs, came to the conclusion that a hard fork of the Terra blockchain would be the wisest course of action. Luna2.0 was born as a result of this. But what precisely is the objective of Luna2.0 and how does it vary from its predecessor, which is now known as LUNA Classic?
In this article, we will examine the history of the Terra blockchain, the LUNC, LUNA2.0, and the differences between the two tokens.
The Terra blockchain and its collapse
Terraform Labs was founded in Seoul in 2018 by South Korean digital entrepreneurs Do Kwon and Daniel Shin.
The Terra blockchain was built with the intention of producing stablecoins, tokens that combine the decentralized freedom of cryptocurrencies with the steadiness of fiat money. As a staking or protocol token, LUNA was a crucial component of this system.
In order to accomplish this, the blockchain had set up a dual token system involving the stablecoins LUNA and TerraUSD (UST). USTs could be exchanged for LUNA and were created by burning the stablecoins.
The concept was that if the UST price rose above $1, the same amount of LUNA would be burned, creating more UST and decreasing the value of the UST. In contrast, they were exchanged for LUNA if the price of UST fell below $1, which increased the value of UST.
Users were able to take part in governance, become validators, and get rewards thanks to LUNA, which acted as the network’s staking and governance token.
TerraUSD (UST) was a stablecoin tied to the dollar using a set of LUNA-based algorithms. The value of the algorithmic stablecoin was established by an underlying set of rules and smart contracts rather than being backed by tangible assets.
UST and LUNA were companion tokens as Terra had a two-token system. For every new UST built, an identical amount of LUNA was burned.
As a result, it was possible to trade one UST coin for one dollar’s worth of LUNA and the other way around. LUNA was essential in preserving the UST’s value and lowering market turbulence. Additionally, it gave traders incentives for arbitrage in order to keep the value of the UST currency in US dollars.
The Terra ecosystem collapsed in May 2022 when the UST separated from the USD. The algorithm depended on the availability of UST and Luna to maintain its peg. Burning or destroying Luna resulted in the creation of UST, which was then used to increase the supply of UST while decreasing the supply of Luna.
This did not always work effectively during times of high volatility, and UST would periodically drift temporarily away from the US dollar. The May collapse, however, was the worst event that has ever happened. The price of LUNA collapsed as a result of the massive volumes of UST that were sold off in a panicky market.
Since then, LUNA and UST have been on an unrelenting downturn, reaching record lows and getting taken off cryptocurrency exchange lists.
What is Luna Classic?
Luna Classic (LUNC) is the original coin of the former chain, now rebranded as Terra Classic. After the fork, the genesis block on the new chain was created, and it was put into operation on May 28, 2022.
The Terra Classic stablecoin, TerraUSD, continues to function as a stabilizing mechanism for the Terra Luna stablecoin, LUNC, which was formerly known as LUNA (UST).
Kwon created a strategy for the Terra ecosystem’s revival in order to save the project, and the blockchain underwent a hard fork with the emergence of the Luna 2.0 network. While a new token was created within the new chain, the previous LUNA token was rebranded as Terra Classic (LUNC).
Decentralized applications (dApps) are still being developed and offered by the developer community, and any dApps created for Terra Luna will also receive priority for LUNA2.0. The project stopped using the algorithmic stablecoin.
In order to reduce the circulating quantity of more than six trillion tokens, the protocol for the LUNC has undergone multiple protocol changes, including adjustments to its burn mechanisms.
What Is Luna2.0?
Luna2.0 is a whole new Terra blockchain token designed to save the Terra Luna ecosystem following the collapse of the stablecoin.
Do Kwon, the creator of TerraForm Labs, proposed that a new chain replace the current Terra network, which he called the Luna revival. Additionally, Luna2.0 replaced the previous version of Luna. It is no longer connected to the UST stablecoin that caused the initial crash.
Luna2.0 was launched on May 28 as part of the Terra chain’s genesis block.
The new Terra blockchain was developed as a means of helping Terra and its investors recover from the severe losses they suffered as a result of the crisis. Due to the fact that so many individuals had suffered financial losses as a result of the crash, TerraLabs wanted to make up for those losses and decided the best way to do that was by using a new blockchain and cryptocurrency.
How LUNA2.0 Works
A conventional proof-of-stake (PoS) consensus mechanism is employed to verify transactions on the Terra 2.0 cryptocurrency network. A total of 130 validators take part in network consensus at any given time, with voting powers according to the number of LUNA2.0 connected to each node. Rewards are produced using gas surcharges and a predetermined LUNA2.0 inflation rate of 7% annually.
Holders of LUNA2.0 tokens can take part in consensus by allocating their tokens to a certain validator. Like delegates, validators frequently stake their own claim. Therefore, until it grants incentives to delegators, the validating node retains the commission in the program.
Depending on the validators’ voting power, different incentives are generated by Terra 2.0 coin delegators. As a result, payments for delegators must be distributed among a larger group of delegators even though individuals with higher voting power naturally earn more benefits.
What is the difference between Luna Classic and Luna2.0?
The new Terra chain functions without the algorithmic stablecoin UST, that is how Luna2.0 differs from Luna classic.
The relationship between the actual Luna cryptocurrency and TerraLabs’ stablecoin, TerraUSD, helped it maintain value (UST). This relationship dictated that if the pool or demand for the other coin fluctuated just a little bit too much, one of the coins would be burned or minted.
LUNC serves as an arbitrage mechanism for the Terra algorithmic stablecoin, whereas LUNA does not because there are no algorithmic stablecoins.
The new chain intends to be entirely community-owned.
Furthermore, the number of LUNA tokens is constrained. In comparison to LUNC, which has a supply of about 7 trillion, the number of LUNA tokens is over 1 billion for the new currency. The circulation supply of more than six trillion LUNC coins has a negative impact on the token price. The largest cryptocurrency exchange in the world, Binance, is now burning all trading fees from LUNC transactions.
Conclusion
Prior to the Terra ecosystem’s collapse, LUNA was a rising power in the DeFi space.
Investing in Luna (LUNA) or LUNC at this time carries a high level of risk.
According to reports, INTERPOL has asked law enforcement agencies all over the world to find and detain Do Kwon. Terraform Labs, the development company behind Terra, is also charged with operating a Ponzi scheme. It is therefore difficult to predict whether LUNC will actually rise from the ashes or merely crash and burn.
The future of the old Terra blockchain, including its LUNC and UST coins, is uncertain, and there is little motivation to use it or construct any projects on it.
However, it is a fascinating cryptocurrency to follow, so be sure to keep an eye out for its next move.
Always do your own research before trading, taking a look at the most recent news, a variety of analyst musings, and technical and fundamental analysis.
Keep in mind that past success is not a reliable predictor of future outcomes. Likewise, never trade with funds that you cannot afford to lose.