Terra Solutions: How is it Moving Forward?
In May 2022, the need for Terra solutions landed. The Terra ecosystem experienced a catastrophic crash, with more than $50 billion wiped out from the market as LUNA plunged by 100%.
Terraform Labs is a platform that introduced one of the most popular algorithmic stablecoins, TerraClassic USD (UST). It also introduced a high-performing coin, LUNA, now known as LUNAClassic. But this year, its price declined from over $100 to $0.
Since then, the platform has been making efforts to revive the project. Among them, one of the significant steps has been the launch of Terra 2.0. Meanwhile, the CEO of Terraform Labs, Do Kwon, has offered several Terra solutions for its restoration.
Here, we look at how the platform plans to move ahead and whether it will be restored in the near future!
How did the crash happen?
The platform operates on a swapping mechanism of two crypto tokens; UST and LUNA. The former is an algorithmic stablecoin backed by USD. The latter powers the blockchain and helps maintain UST's value at $1.
This system allows holders to swap these tokens to get a guaranteed $1.
Unfortunately, this mechanism was not sustainable as there were no assets to back UST. That’s why when it lost its peg to the USD, it crippled the entire ecosystem. The algorithm failed when people started to burn LUNA to get UST’s $1.
Terra solutions proposed by Do Kwon
Right after the debacle, the founder and CEO of Terraform Labs took to Twitter to propose solutions for the recovery of the ecosystem. Kwon tried to reassure the LUNAtics community in a thread and gave possible Terra solutions. He acknowledged the selling pressure on LUNA and proposed a four-times increase in minting. The idea was to help strengthen TerraUSD so investors could cash it out anytime. Kwon also formally presented it at the governance forum.
Terraform Lab’s CEO put forth another proposal, 1623. This endorsed the origin of a new chain, which was eventually accepted. Following the acceptance of this solution, a 2.0 version surfaced, and previous versions were renamed to classic ones. The ecosystem also airdropped the new tokens for the existing holders. This was a recovery plan to reset the network.
Are Do Kwon's Terra solutions sustainable?
After the emergence of a new chain, LUNA has seen a quiet recovery period. Besides, it recently experienced a positive run where its price reached $6.72. However, currently, it's worth is again down to $2.72. It would be too early to comment on how this new blockchain is performing. But, indeed, there are some key issues.
First, this version has not influenced the current state of the classic UST. One reason behind that is the lack of investor confidence in the token. Investors are still not ready to exchange their dollars for this stablecoin.
Second, its airdrops pledge 40% for the old token holders. This move will also be ineffective as it would distribute the amount unequally. Ideally, the holders who have more stakes should be compensated more.
Moreover, another loophole about the airdrops is the involvement of the Anchor protocol. Not all investors had their tokens on this platform at the time of the collapse. So, how will it compensate wallets on other exchanges?
Nonetheless, these Terra solutions are quite reasonable considering the extent of the collapse. However, for a sustainable solution, transparency is most important. Moreover, the lack of clarity about the $3.5 billion Bitcoin reserve, and the issue of Kwon hiding from the authorities, have increased the community’s suspicion.
Terraform Labs have gone through a disastrous collapse. So far, it is the worst in the crypto market’s short history. The loopholes in its algorithmic stablecoin resulted in draining billions from the market. Several Terra solutions were advanced for recovery. One major step towards it has been the fork of the blockchain.
It has helped in the recovery phase of the ecosystem. But there are still several issues with this approach. For sustenance, changes in algorithm and transparency are inevitable.
Author: Wasay Ali
I'm a content writer with adequate SEO knowledge. My hobby is to exercise, read and write. My writing experience currently expands to 2 years and I’ve worked on multiple niches, including finance. My versatility and research skills make me the best at what I do: content & SEO writing. I love writing because it pitches in and helps me learn new things daily.