What is Terra Classic (LUNC)?
Terra Classic (LUNC), formerly Terra (LUNA), is the original native governance token of the Terra ecosystem. The token was left behind after the implosion of Terra’s algorithmic stablecoin UST and the establishment of a new Terra chain.
The primary objective of Terra Classic (LUNC) was to help UST maintain its dollar peg through an algorithmic incentive mechanism. This was made possible through arbitrage traders, who could use the inefficiencies in the ratio between LUNA and UST to profit off the difference while simultaneously helping UST hold its peg.
For instance, when UST was trading below its dollar peg, arbitrageurs could burn UST to mint LUNC. This way, they decreased the supply of UST and helped bring its price back up to a dollar while also earning some profit.
Similarly, when UST was trading over its dollar peg, arbitrageurs could burn LUNC and mint UST, increasing the supply of UST and helping bring its price back down to the peg.
How Did LUNC Crash to Zero?
In April last year, LUNC registered an all-time high of around $120. However, following the collapse of the Terra ecosystem, the token crashed to zero, dropping to as low as $0.00001675.
Several major events contributed to the crash:
- In the first place, about $2 billion worth of UST was unstaked from the Anchor Protocol, and hundreds of millions of it were then immediately sold. Anchor Protocol, a lending and borrowing protocol, offered up to 19.5% yield on UST deposits and was the main reason behind the popularity of the stablecoin.
- The sudden sell-off led to the price of UST dropping to $0.91. This triggered a wave of panic buying, as people rushed to purchase Terra Classic (LUNC) with UST, taking advantage of the fact that 1 UST could always be redeemed for $1 worth of Luna.
- Swapping and burning UST for LUNC meant minting more of it, diluting the supply, and dropping the price of this token. Additionally, as its price dropped, it would require more and more of it to swap 1 UST for $1 worth of LUNC, which means minting even more of Terra Classic.
- This surge in demand for token coincided with a broader market downturn across the cryptocurrency landscape, which further crashed the token’s price. As the market capitalization of LUNC fell below that of UST, a critical problem arose.
- UST, being algorithmically linked to it for stabilization, found itself de-pegged since the total value of UST could no longer be redeemed against LUNC. The downward spiral of UST’s value directly impacted token, causing its price to crash at an alarming rate.
Nevertheless, the sudden influx of Terra Classic supply, combined with UST’s de-pegging, resulted in a continued decline in the price of LUNC until it reached a near-worthless state.
The exact motivations behind the initial unstaking of UST and subsequent sell-off are still not clear. While some speculate that these actions were part of a malicious attack on the Terra ecosystem, there is no concrete evidence to support any such claim.
Do Kwon Purposes Hard Fork to Save Terra
Following the crash of the original Terra blockchain, Terraform Labs founder Do Kwon proposed a revival plan involving a hard fork and abandoning UST. The plan divided the Terra Network into two chains.
More specifically, it said that the initial chain will continue to exist and will be called the “Classic” chain, with the original LUNA termed as Luna classic (LUNC) token. The new chain will be called LUNA 2.0 with its token Luna (LUNA).
While the old LUNA would co-exist with LUNA 2.0 rather than being entirely replaced, the new chain was prioritized by the developer community. In other words, any decentralized applications (DApps) launched for Terra Luna will be favored for LUNA 2.0.
It is worth noting that new Terra coins were airdropped to original holders of LUNC and UST. The proposed supply of LUNA was capped at 1 billion, with 25% going to the community pool, 5% to essential developers, and 70% going to LUNC and UST holders at various snapshots of events in May, subject to vesting conditions.
LUNC Community Continues to Support Token
Terra Classic has managed to maintain its community despite the launch of a new Terra blockchain, as many investors and traders oppose Do Kwon’s restoration plan. In fact, the community has been pushing various initiatives to revive the dying project.
For one, the community has agreed to burn as many LUNC tokens as possible to reduce the coin supply and raise individual token prices. To do so, they have implemented a 1.2 percent burn tax on all transactions.
Binance, the world’s largest crypto exchange, has also been burning LUNC in order to help decrease the token’s supply. The exchange currently burns 50% of its spot and margin trading fees.
According to data from LunaBurnTracker, over 68.32 billion LUNC have been burned so far. In total, LUNC has a circulating supply of 5,816,666,740,229.
LUNC is the original native governance token of the Terra blockchain and was intended to help UST maintain its dollar peg through an algorithmic incentive mechanism. However, a sharp sell-off and plunging crypto prices triggered a death spiral for both coins.
While the Terra Classic blockchain has been largely left behind by the developer community following the creation of the new blockchain, it still has an active community. In fact, the community has been pushing various initiatives to revive the dying project, including token burns.