What is LUNA (or LUNA 2.0)?


6 mins read March 13, 2023

This crash resulted in a blockchain split, also known as a hard fork, which created a new blockchain and token that operate independently from the former today. 

While LUNA or LUNA 2.0 represents the newly generated LUNA tokens after the fork, the original LUNA coins are now known as LUNA Classic or LUNC.

This article seeks to share all you need to know about the token LUNA and its newly launched LUNA 2.0 token.

Brief History of LUNA

Before now, old LUNA tokens, now called LUNC, were the native coin of Terra, a blockchain technology developed by Terraform Labs, a Korean firm, in 2019. 

Terra is a layer one blockchain protocol whose native coin LUNA was used as a protocol token to lower the volatility of the blockchain's stablecoins and make payments on the blockchain.

Today, LUNA refers to the newly issued tokens of the Terra 2.0 blockchain.

Brief History of Terra (UST)

Terra, or UST, was a stablecoin token of the Terra blockchain, whose duty was to maintain its stability through an elastic money supply for the network. The token's revenues were used to reward investors and upgrade its blockchain.

It is important to note that TerraUSD was not pegged to the US dollar; instead, smart contract algorithms determined its price using the LUNA token.

In 2021, Terra activated a series of Colombus-5 main net upgrades to its system, which caused a spike in LUNA. Initially, LUNA was $1.31, but after the upgrade, it rose to an ATH of $49.95 and ended the year at $103.33. 

The Colombus-5 update was to facilitate the movement of Terra stablecoins across blockchains faster and quicker. Terra achieved this by integrating with Cosmos, a network of multiple blockchains. 

The update ensured that burned LUNA tokens would remain permanently burned and unusable, reducing the number of tokens in circulation and increasing their value. 

How does Terra work?

Terra’s blockchain technology was built on Cosmos SDK, an open-source framework for building multi-asset public Proof-of-Stake (PoS) blockchains. It has validators who mint and verify transactions on its blockchain for rewards. 

The top 130 active validators with the most LUNA tokens are selected to secure the network. Validators and stakers on the blockchain can also participate in the network consensus. However, their voting powers are proportional to their stake in the blockchain. 

Terra users can access the blockchain network directly with its native wallet, Terra Station. With the wallet, users can easily interact with Terra-based decentralised applications (dApps), swap tokens, and manage their funds. 

How does LUNA work?

LUNA is a governance token for staking and acts as collateral (an asset that stablecoins on the blockchain are pegged to). By staking their LUNA token, validators earn rewards and contribute to the network’s protocol. 

For validators to mine LUNA, they must first stake their tokens on the blockchain. Validators with more LUNA tokens have a higher chance of generating the next Terra block and earning a token.

What makes LUNA unique?

The following are factors that make LUNA an interesting crypto asset;

  • Fast cross-border payments: Terra stablecoins allow seamless cross-border exchange at the lowest cost globally. Terra has a six-second average block time which allows for speedy transactions across the globe. 
  • Low transaction fees:  Transactions on the terra blockchain have one of the lowest fees in crypto.
  • Interoperable: Terra runs on Terra Bridge, a cross-chain system that enables Terra tokens to be interoperable. Terra tokens can be transferred between Binance Smart Chain and Ethereum, and efforts are underway to support cross-Solana transactions. Terra also runs the CHAI payment software, which allows Terra's users to complete payments seamlessly on its blockchain.
  • Automatic liquidity pool: The tokens are automatically staked after deposits on its protocol, saving users the time and effort of finding their liquidity pool. You can easily use Terra tokens across the many applications built on its protocol. 

Criticisms of LUNA

LUNA has often been praised for its features while simultaneously coming under fire for several reasons. Some of the issues include:

  • Poor decentralisation: It has only 130 validators securing its network as opposed to Ethereum, which has about 3,038, and its top network validators hold over 40% of its delegated supply.
  • Price volatility: Terra was criticised for being prone to price volatility as smart contracts and validator incentives were used to peg its stablecoins rather than a real asset value. This issue led to the famous Terra LUNA crash.
  • SEC lawsuits: Terraform Labs has also been charged with a lawsuit by the US Securities and Exchange Commission for security violations such as the unregistered operation of its brokerages and sales of securities.

With the recent changes in Terra, it has a long way to go if it will ever catch up with leading DeFi chains like Ethereum.

The Death of LUNA and the Birth of LUNA 2.0?

The major problem that led to the fall of terra (UST) and LUNA was that they weren’t tied to a stable asset like gold or even the U.S. dollar but were pegged to a coin as volatile as any other crypto, LUNA.

All seemed fine for the “lunatics”, as the community calls itself, until the crypto market had an extended bearish season and a global recession in early 2022 that crushed most coins, including LUNA. 

To manage the situation, Terra’s founder, Do Kwon, proposed creating a hard fork (blockchain split) in the network to permanently de-peg LUNA from UST. After most of the Terra community voted in favour of this, LUNA 2.0 was born.

LUNA or LUNA 2.0 became the name of the new Terra token released on May 27, 2022, while Terra's original LUNA tokens were named Terra Classic (LUNC). 

Today, both coexist since it is a community-governed blockchain, and some investors and developers choose to still build on the Terra Classic network.

LUNA 2.0 Airdrop procedure

To compensate the affected members, LUNC holders were given airdrops of LUNA 2.0 or LUNA tokens in the following proportion;

Pre-attack LUNA  holders receive 35%,

Post-attack LUNA  holders receive 10%,

Pre-attack aUST holders receive 10%,

Post-attack UST holders receive 15%,

The Community Pool receives 30% (with 10% for developers) and is controlled by stakeholder governance.

The quantity of Terra Classic tokens determined this sharing formula and the time one held the token (based on pre-attack and post-attack reports).

To ensure sustainable tokenomics, LUNA 2.0’s total supply of 1 billion won’t be all at once at launch released gradually.

Understanding Terra Tokenomics (LUNC Price vs LUNA Price)

As of March 13, 2023, the price for LUNA is $1.39, with a market cap of $322,078,583 and a total circulating supply of 232,492,206 LUNA tokens.

On the other hand, Terra Classic's (LUNC) price is $0.0001308, with a market capitalisation of $771,640,545 and a circulating supply of 5,894,198,334,080 LUNC tokens.

What Next For TerraForm Labs?

Terra is a decentralised, permissionless, and programmable payment network with a new native token, LUNA or LUNA 2.0.

The protocol allows online merchants and their customers to make low-cost payments and transactions. Terra's open network is also well-suited to decentralised applications, resulting in a thriving ecosystem around the protocol. 

Disclaimer: This article is meant to provide general guidance and understanding of cryptocurrency and the Blockchain network. It’s not an exhaustive list and should not be taken as financial advice. Yellow Card Academy is not responsible for your investment decisions.

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