Luna Classic VS Luna 2.0: Is Any Difference?

By Notum DeFi App | Notum DeFi App | 10 Jul 2022

At the beginning of May, most cryptocurrencies fell by more than 20%. However, Terra (LUNA) lost 99.99% of its value in a week, falling from $87.15 to $0.01. The UST stablecoin fell in price by more than 60% in 3 days. On May 12, the asset was trading at $0.37.

The collapse of one of the largest coins destroyed the fortunes of crypto investors. Members of the TerraLuna community wrote about unprecedented losses. Against the background of all these events and the community’s negative reaction, Terra co-founder Do Kwon decided to take a desperate step. He decided to restart the network under Terra 2.0 (Phoenix-1).

The new network was launched on May 28. Following the approved measure, the original blockchain was separated and is now called Terra Classic. Luna, whose value has fallen to almost zero, was renamed Luna Classic with the LUNC ticker. All stablecoins released on Terra Classic also received a new name. For example, TerraUSD (UST) was renamed TerraClassicUSD (USTC). As for the new blockchain, Terra works with a coin under the existing name and ticker, LUNA, and omits the UST stablecoin.

Why Terra Crashed?

In February 2022, the reserves of Anchor’s crypto bank were replenished by investors for $450 million to provide additional UST profitability.

Anchor accepted deposits and issued loans, the interest from which, in theory, was supposed to cover the cost of paying 20% interest to deposit holders. However, these funds were insufficient to maintain the algorithm because the number of deposits exceeded the number of loans issued. Therefore, they had to announce a temporary reduction in interest on deposits by 1.5% per month. 

The number of deposits has decreased by a multiple: token holders have withdrawn more than $10 billion, while the UST price is falling sharply. Due to the large release of LUNA, the algorithm tried to stabilize the situation, but unfortunately, these volumes were not enough. The tweet of the founder Do Kwon that $1.5 billion reserves in BTC were sent to buy UST to maintain the exchange rate, temporarily stabilizing the situation to $0.9.

Large outflows of assets from DeFi platforms led to a decline in the LUNA exchange rate. But the main thing is that Do Kwon’s statement meant that the Terra reserve is not controlled by an algorithm but manually. So whales (large investors) used this information to “push” the price of the stablecoin and create a profitable arbitrage opportunity. After that, UST went straight “to the bottom”.

Investors have lost more than $40 million, and trust in Terraform Labs is forever lost.

Terra 2.0 Launch

The launch of a new network is part of the plan of Terra co-founder Do Kwon to revive the collapsed project. According to his idea, the new tokens should be distributed among the affected users. However, this idea was received highly negatively in the crypto community.

The Terra community has been considering various recovery options. But in decentralized systems, it is impossible to reach a consensus. Some groups are for a hard fork, someone would like to leave everything as it is, and others to launch a new network without reference to the previous transaction history. As the main rescue option, a hard fork on a certain block was considered before the events that caused the collapse of LUNA and UST, i.e., to save all balances and start from the zero blocks, erasing the entire transaction history. This would allow you to boot from the last “successful save.” But the decision was greatly influenced by the opinion of Binance CEO Changpeng Zhao, who opposed the fork. According to him, the fork will not create any value, and the exchanges already have a history of transactions and trades that cannot be erased.

Creating the project from scratch satisfied most of the groups influencing the project’s success. Among them were the largest exchanges, which allowed massive liquidity at the start and increased the chances of a successful network restart. And to ensure this liquidity, it was decided to make an airdrop of new tokens. When launching the new network, Luna owners received Luna 2.0 tokens. Their distribution is as follows:

  • Community Pool: 30% (10% of which will belong to developers);
  • Luna owners before the attack: 35%;
  • Luna owners after the attack: 10%;
  • UST owners before the attack: 10%;
  • UST owners after the attack: 15%.

Market analysts have fiercely criticized the new Terra 2.0 LUNA cryptocurrency. They noted that the digital asset did not meet the expectations of users. Experts stressed that in just 6 hours from the moment the token was released on the exchanges. Its value fell by 80%, from $18 to $4. The owners of LUNA Classic (LUNC) and Terra Classic USD (USTC, formerly UST), who received 70% of the LUNA 2.0 issue, began frantically getting rid of assets to recover their losses.

Terra Classic VS. Terra

In fact, Terra 2.0 is the same as Terra. Terra remains one of the most powerful decentralized platforms for launching decentralized applications. Tendermint consensus and groundbreaking technologies, including Mantlemint and Terrain, also remain unchanged. Against the background of the launch of Terra 2.0, users again gained access to the tools of the project ecosystem, including TerraFinder (blockchain explorer), TerraStation, and TerraObserver. Speaking about the practical significance of Terra 2.0, we note that “under the hood” of the new platform is an entirely new Phoenix-1 network. The main changes are greater decentralization and the rejection of using algorithmic stablecoins to reduce risks to the system. According to the developers, the inflation of tokens will be strictly regulated, and the staking reward will be 7%.

However, Terra has some serious obstacles that need to be overcome since a new blockchain is being created from block 0. For example, dapps or assets from the old chain (Terra Classic) will not exist earlier on Terra (as in the fork) and, therefore, will have to migrate. The need for migration means that any Terra project that has announced support for a new network will have to decide whether to continue to support its dapp on Terra Classic and Terra or abandon one in favor of the other.

Despite the technical difficulties, the network is stable, as most applications migrated to the new network from Terra Classic. A few decided to go to other networks because it is technically challenging to implement (from scratch to rewrite the entire source code for another network).


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