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Is Terra LUNA an Archetype of Ponzi Schemes? The Answer Lies in Its Timeline

27 July 2022 07:59, UTC
Anirban Roy

Despite immense popularity, fiat-backed stablecoins have a few underlying severe concerns that no investors can ignore. And that's how the space is created for algorithm-backed stablecoins such as Terra UST. So naturally, there was enormous anticipation around Terraform lab's stablecoin, UST, and the crypto connected with its burning mechanism, Luna, and both tasted a roaring success until May 2022.

Many financial experts, media, and investors adored the concept of automatically burning coins to retain the Terra UST's dollar peg. However, nobody dared to ask Do Kwon what would ensure Luna's dollar peg for its upward mobility soon after the launch. Do Kwon announced to build a reserve fund of Bitcoins, among other popular cryptocurrencies. Interestingly Luna Foundation Guard, a non-profit firm owned by Do Kwon, kept the $3.5 billion worth of Bitcoins and additional cryptocurrency funds.

The investors were told the reserve would maintain Terra's value and push LUNA to become a top crypto project on the market. To impress its investors, Do Kwon, co-founder of Terraform Labs, announced a 20 percent yield per annum for lending out the purchased Terra. The high yield, among many other factors, made Terra a massive crypto until May 2022.

To understand how the exemplary success of LUNA collapsed like a house of cards, you should have a detailed look at the significant events and whereabouts around the cryptos of the Terraform labs, including Terra UST and LUNA.

Terra and LUNA – The Timeline

  • Terra Alliance: The Beginning

In January 2018, Do Kwon and Daniel Shin rolled out Terra Network as a stepping stone to launch an e-commerce payment software and stablecoin. And after one whole year of its existence, Terraform Labs unveiled its first cryptocurrency Luna, via an initial coin offering (ICO) in January 2019. The LUNA was made available at 18 cents during the seed round, surging to 80 cents during the private selling period. In the same year, Do Kwon, with a few co-authors, rolled out the anticipated white paper.

  • Anchor, UST unveiled

LUNA started gaining momentum soon after its launch on the global cryptocurrency exchanges. Then, terraform's chief researcher, Nicholas Platt, foreseeing its shining future, announced Anchor Protocol. The platform is a node infrastructure provider for proof-of-stake blockchains. Furthermore, the Anchor garnered a lot of attention among crypto traders by offering a high yield. Finally, in the latter half of 2020, Terra unveiled its home-brewed stablecoin UST.

  • The Skyrocketing rally

Starting from the beginning of 2021, all the crypto assets from Terraform Labs started showcasing high hopes in the market by continuing its bull run throughout the year. The skyrocketing price of Luna continued till the beginning of 2022 when Do Kwon unleashed Luna Foundation Guard to retain UST's dollar peg even during the volatile market phase. LFG raised one billion U.S. dollars by selling Luna to buy Bitcoins for the United States Treasury Reserve System. Later LFG's Bitcoin wallet address tipped to buy 35,768 Bitcoins in several phases. As a result, Luna's price upped almost $119.2, and UST became the third largest stablecoin in the crypto market.

  • The freefall of Luna

The existence of Luna and TerraUSD was based on a simple algorithm. You can mint one dollar worth of Luna by burning an equal worth of TerraUSD and vice versa. So to earn one dollar worth of Luna, you are supposed to burn one dollar worth of Terra UST. But if the price of UST alias Terra UST comes down to less than a dollar, the amount of Luna you get for less than a dollar. So the algorithm looked brilliant during the initial phase. Still, the logic behind the algorithm digs the grave for another as any price fluctuation on any of the coins would directly affect another.

Seeing the immense arbitrage value, traders started holding Terra USD in another Terraform labs project called Anchor Protocol. And in exchange, Anchor used to offer a 20% interest rate, which is better than holding money in a bank account.

In March 2022, Terraform Labs suddenly announced the fixed interest rate with a variable one, resulting in traders selling off their Terra USD and Luna tokens. And when a massive number of people started quitting UST, the automatic burning process skyrocketed the Luna supply, resulting in its price tanking. And once the pair plummeted, traders started panicking and sold more tokens, resulting in price freefall. Finally, the hysteric event reached a great point when Binance blocked all sorts of withdrawal from Luna and Terra USD. But the nosediving of Luna and related tokens did not show anywhere until Luna reached a fraction of the U.S. Dollar.

The shattering incident continued, and seeing the sudden death-like situation, Do Kwon announced to launch of a revived version of Luna – Luna 2.0.

The Rebirth of a failed star – Luna 2.0

Terraform Labs has rolled out the Luna 2.0 with high hopes around it. Overseeing its track records with the original Luna token, many veterans and youngsters are bullish on its latest avatar – Luna 2.0. The new token broke all the shackles with UST and replaced the old blockchain with a newer one. Do Kwon announced that Luna 2.0 would allow most dApps to migrate to the newer chain. The old Luna token has been renamed Luna Classic.

There were initial ripples during the launch of Luna 2.0, which got sold at $19.64 after they offered airdrops to existing Luna holders, but soon after, the price started plunging to $1.8. With the scars of losses from the Luna and UST, the Luna 2.0 would take a lot of effort from its old charm.

However, a bunch of analysts still have high hopes around Luna 2.0, and they believe the price of it might be multifold in coming years. But these claims live in the thin air until Terraform Labs come up with convincing projects. For now, the sky above Terraform Labs and Do Kwon is grim and continuously landing one after another trouble.

The inviting troubles for Do Kwon and Terraform Labs

  • The famous hacktivist group Anonymous has recently threatened Do Kwon to bring him down to justice. Through a YouTube video, the hacktivist collective has poked its fingers at Do Kwon, claiming he has withdrawn 80 million U.S. dollars from Luna and UST before its collapse. Anonymous is also investigating the history of Do Kwon since day one of his arrival into the crypto space. Denying the allegations, Do Kwon has claimed he faced a significant loss, just like fellow crypto investors.
  • The company has also been penalized $78 million by the South Korean National tax agency for tax evasion charges. However, this is not the end of the list of troubles Do Kwon and fellow Terra co-founders.
  • Following the debacle, the U.S. Securities and Exchange Commission (SEC), aligned with South Korean state investigative agencies, has investigated whether there were any wrongdoings behind the fall of Luna. The South Korean prosecutors have already put a list of Terraform Labs employees on a no-fly list and are carrying out search and seizure operations at several South Korea-based crypto exchanges and related offices to discover any wrongdoings. The agencies initiated the investigation after a myriad of UST and LUNA investors accused Do Kwon and Daniel Shin of fraud. The authorities are also investigating alleged criminal charges against Do Kwon for operating Ponzi schemes
  • The list of troubles Terra is facing is even more prolonged. Recently over 48 Terra Blockchain projects have moved to Polygon blockchain. The list includes a non-fungible token (NFT) store and an exclusive marketplace.

Final Words

The investigation against Terraform Labs and its co-founders is moving quickly and would take some time to take a final call on whether the entire business of Terraform Labs is a Ponzi. But speculative investors are still putting money on it, foreseeing a massive return in the next bull run. Only time will tell whether these optimists or the doomsayers are true about Luna.