Terra has become synonymous with the word misery in the crypto sphere, leaving behind countless tales of shattered dreams when the erstwhile high-flying stablecoin TerraUSD (UST) and its sister coin LUNA experienced a death spiral a few weeks back. But that is not preventing a new breed of risk-takers from betting on the burnt embers of the Terra 1.0 ecosystem. As a refresher, Terra 1.0 maintained UST’s $1 peg by algorithmically adjusting the supply of UST and LUNA coins. If the price of UST fell below $1, the supply of UST was burnt by minting $1 worth of LUNA, entailing a swap fee that was paid in LUNA coin. This reduced UST’s supply and allowed the peg to be restored. The opposite would take place if the price of UST exceeded $1. These swap fees played an important role in funding staking rewards. Moreover, the swap fee tolerance determined the amount of LUNA/UST that could be burnt or minted at a given time. However, a few weeks back, Terra faced a concerted attack that quickly transformed into a hyperinflationary death spiral for the native LUNA coin when the network failed to restore UST’s $1 peg, resulting in outsized losses for a large proportion of LUNA and UST holders, and exposing the utter fragility of algorithmic stablecoins. Basically, the structure’s inherent limitations meant that LUNA coins could not be minted in sufficient quantities to restore UST’s $1 peg, but the new supply did continue to erode LUNA’s value, making peg restoration that much more difficult. Terra’s disgraced co-founder, Do Kwon, then played an important role in launching Terra 2.0, effectively dividing the Terra ecosystem between a new blockchain sans the eviscerated stablecoin – termed Terra 2.0 – and the older chain called Terra 1.0 or Terra Classic, featuring UST Classic (USTC) and LUNA Classic (LUNC). However, Terra 2.0 remains unpopular, with many exchanges continuing to support USTC and LUNC coins, including Binance, Huobi, Crypto.com, BitMart, OKX, ByBit, etc.
Gamification of Terra 1.0 Continues
This brings us to the crux of the matter. In recent days, LUNC and USTC values have increased dramatically from their respective nadir. For instance, LUNC is up over 47 percent while USTC is up 184 percent in the past 24 hours. This price increase is a result of a concerted campaign to try to burn a hefty proportion of over 6.5 trillion LUNC coins in circulation currently. This Twitter thread explains the residual value thesis around Terra 1.0:
- terra1 survives as an unsecured credit-issuance chain2. its core mechanisms are contingent on parity maintenance3. value is captured on parity maintenance - not deposits (collateralization) and circulating those https://t.co/QcJ3N0tnwH — rêve is a scrapyard titan (@wrapped_dday) June 22, 2022 Basically, people are betting on the very remote possibility that somehow the USTC peg is restored. With prices at rock-bottom currently, the risk-reward ratio is certainly quite attractive:
imo this is more of a knife i watched fall to the ground in front of me and i’m trying to pull it out. i was fortunate enough to actually gain money by investing post-crash — rêve is a scrapyard titan (@wrapped_dday) June 22, 2022 This is essentially a “gamification” of the Terra 1.0 ecosystem, where some people are burning LUNC coins to increase the value of their holdings, only to be hampered by “rent-seekers” who buy USTC coins, thereby requiring LUNC holders to burn even more supply. The USTC holders then dump their coins at a tidy little profit.
…which is how it’s designed. Then you can just capitulate your USTC holdings (which likely leads to more de-pegging, but again…how it’s designed) — rêve is a scrapyard titan (@wrapped_dday) June 27, 2022 Essentially, people are playing with ashes and betting on the remote possibility that it magically transforms into snowflakes, that is, the peg is restored. Do you think there is life yet in the Terra 1.0 ecosystem? Let us know your thoughts in the comments section below.
