The Original Terra Ecosystem and its Collapse
The original Terra blockchain, launched in 2019 by Terraform Labs co-founders Do Kwon and Daniel Shin, aimed to provide a decentralized, price-stable payment system.
Dual-Token System: The system relied on two tokens: the native governance/reserve token (LUNA) and algorithmic stablecoins like TerraUSD (UST), which was pegged to the US dollar.
The Mechanism: To maintain the peg, users could swap $1 worth of LUNA for 1 UST and vice versa. This arbitrage mechanism was designed to absorb volatility.
The Crash: In May 2022, large withdrawals from the Anchor Protocol (a dApp offering a 19.5% yield on UST deposits) led to a massive sell-off of UST. The algorithmic peg broke, triggering a "death spiral" where users frantically burned UST to mint trillions of new LUNA tokens, causing hyperinflation and wiping out over $40 billion in value almost overnight.
Current Status
Following the collapse, the Terra community voted to implement a revival plan that resulted in a hard fork: the creation of the new Terra (LUNA) chain without the stablecoin, and the rebranding of the original chain to Terra Classic (LUNC).
Terra (LUNA) Today: It functions as a proof-of-stake smart contract platform built on the Cosmos SDK, focusing on rebuilding its dApp ecosystem.
Terra Classic (LUNC) Today: It continues as a community-driven project with a massive circulating supply, relying on community-led initiatives and token burns to try and regain value, though most original developers have moved on.
Regulatory scrutiny intensified after the crash, leading to legal actions against Terraform Labs and its founder Do Kwon, who was arrested in Montenegro in 2023 on charges related to the collapse. Terraform Labs filed for bankruptcy in January 2024.
