Why Terra (Luna) just clawed back some losses

The founder of Terraform Labs has a plan to revive the broken blockchain.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

What happened

Earlier this month, the Terra (CRYPTO: LUNA) blockchain effectively collapsed. The breakdown started when stablecoin TerraUSD (CRYPTO: UST) lost its peg to the U.S. dollar and the built-in arbitrage mechanism failed to resolve the problem. At that point, panicked investors started selling Luna and TerraUSD hand over fist.

However, Terraform Labs founder Do Kwon has a plan to revive the broken blockchain, and optimism surrounding that plan has both coins soaring today. As of 3:00 pm ET, Luna and UST were up 62% and 25%, respectively, in the last 24 hours.

So what

Kwon discussed his revival plan for Terra in a recent blog post. Specifically, the blockchain will be forked to create a new chain, but the new chain will not include the UST stablecoin. Kwon's plan also outlines the creation of 1 billion new Luna coins, which will be distributed among developers alongside pre- and post-crash holders of Luna and UST.

The voting period is still open, but the proposal has already surpassed the threshold for adoption, and the fork is set to take place on May 27. At that time, the old chain and cryptocurrency will be known as Terra Classic and Luna Classic, while the new chain and cryptocurrency will be known as Terra and Luna. Of course, Kwon's proposal does not guarantee that investors will recoup all crash-related losses. The market will have to decide what the new Luna coin is worth.

Now what

Terra was once a thriving ecosystem of decentralized finance (DeFi) services. Anchor (CRYPTO: ANC) was the crown jewel, a lending protocol that paid 20% interest on UST deposits. But the platform included a number of other noteworthy applications. The Mirror protocol allowed investors to trade synthetic assets, and the Chai payments app had over 2 million users in South Korea.

After the blockchain's collapse, the future of the Terra ecosystem is questionable at best. The relationship between UST and Luna was the primary source of value. DeFi products like Anchor were designed to drive demand for UST, and Luna was designed to absorb stablecoin price volatility. To that end, Luna was supposed to become more valuable as demand for UST increased. Instead, the opposite happened and investors lost over $40 billion.

Even if the new blockchain earns the trust of the crypto community, Terra won't be the same without its native stablecoin. For that reason, I think this is a "watch and wait" situation. Terra may regain its former glory, or it may fade into the background of the crypto industry. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns and has recommended Luna. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips. 

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