Exploring the Fallout: The Terra LUNA Recovery Efforts
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Chapter 1: Understanding the LUNA Collapse
The catastrophic plunge of LUNA, which has seen a staggering drop of over 99.9999%, alongside the depegging of UST now trading at a mere $0.16, has resulted in a loss of over $40 billion in investments. This downturn has severely undermined public confidence in Terra Labs and dealt a significant blow to the Terra blockchain's infrastructure.
In the wake of the UST crisis, the blockchain attempted to stabilize the so-called stablecoin by burning UST and minting new LUNA. This process led to the creation of over 6.5 trillion LUNA in just a few days, drastically diluting the value of existing tokens while failing to restore the UST peg.
Update: With the launch of Terra 2.0, is there a chance for redemption?
Chapter 2: The Terra LUNA Recovery Strategy
As of May 14, Terra has ceased the minting of LUNA, and the price has finally found some stability around $0.0003. However, this effectively means that UST has been abandoned and left to its fate, as the minting mechanism will no longer assist in regaining its peg. With no backing from underlying assets, UST is in a precarious situation.
Do Kwon's Initial Revival Plan for Terra
The Terra community, often referred to as "Lunatics," has been diligently brainstorming potential revival strategies for LUNA and the broader ecosystem. CEO Do Kwon has proposed a plan to "reconstitute the chain to safeguard the community and developer ecosystem."
This could lead to a "hard fork" if validators do not reach a consensus on the proposal, resulting in two distinct chains sharing the same ledger up to the point of forking.
Section 2.1: Details of the Revival Proposal
Kwon’s proposal entails resetting network ownership to 1 billion tokens and establishing a weight-based reward system:
- 40% allocated to LUNA holders before the crash
- 40% for UST holders
- 10% for LUNA holders who invested up until the halt
- The final 10% designated for a Community Pool aimed at future development
- An additional 7% APR incentive for validators
Subsection 2.1.1: Implications for LUNA and UST Holders
The implications for LUNA holders vary greatly depending on their purchase timing. For those who held LUNA prior to the crash, there’s a potential silver lining. Under this proposal, 40% of the new LUNA—let’s call it nLUNA—will be allocated to pre-crash holders in accordance with their previous holdings.
Next on the agenda is addressing the losses faced by UST holders, who have witnessed their investments diminish in what was intended to be a stable asset. The remaining 100 million nLUNA will be distributed to those who bought in after the crash.
Section 2.2: Implementation of the Proposal
For the proposal to be enacted, validators will need to cast their votes. According to LUNA's governance structure, the proposal may either succeed—leading to a hard fork—or fail. The distribution method for nLUNA to LUNA and UST holders remains uncertain, but there’s a possibility that holders may need to swap LUNA for nLUNA or risk retaining assets on an orphaned chain.
Will the Revival Efforts Succeed?
Opinions on the proposal are mixed, but there appears to be a consensus among the Terra community that this is the most viable path forward.
However, it’s crucial to note that Binance’s CEO has voiced his concerns, suggesting this strategy may not be effective.
Chapter 3: Personal Reflections on the Situation
The primary challenge in restoring LUNA lies in rebuilding public trust and addressing the grievances of those most impacted by this crisis. The chain itself is secondary to these concerns, but a functional chain is essential for recovery.
Various alternative solutions could potentially aid in compensating those who have suffered significant losses. For instance, CZ has proposed the rapid burning of LUNA as a potential means to regain value.
Potential Solutions Include:
- Immediate burning of LUNA
- Ceasing the minting of any further LUNA
- Backing all stable assets with real value, such as USD or BTC
Users should approach algorithmic stablecoins with skepticism. The lessons learned from this situation underscore the inherent risks associated with such assets.
Section 3.1: Kwon's Second Revival Proposal
Kwon has released a new revival proposal that includes forking the chain, which appears similar to the original plan and suggests a lack of innovative solutions. The key points of this new proposal include:
- Forking the Terra chain to create a new version without the algorithmic stablecoin
- Retaining the old chain as Terra Classic (token LUNA Classic — LUNC) and the new chain as Terra (token LUNA)
Kwon states that LUNA will be airdropped to Luna Classic stakers, holders, and UST holders. Nonetheless, I maintain that forking the chain—whether hard or soft—will not be a sustainable long-term fix.
Is Abandoning Terra Labs an Option?
Allowing Terra Labs to collapse would be ill-advised for multiple reasons. The drive to salvage the project is not rooted in confidence in Kwon but rather in the significant financial stakes involved.
With over $40 billion lost, many individuals have been left devastated. The repercussions of an abrupt collapse could extend beyond Terra, affecting numerous web3 startups and established projects reliant on the Terra ecosystem.
The uncertainty surrounding Terra’s potential recovery remains, but public confidence in algorithmic stablecoins has been fundamentally compromised.
Update: Terra 2.0 experiences a drop of over 80% in just 10 days.
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