Chapter 1: Terra (blockchain)
The blockchain system and payment platform known as Terra is utilized for the purpose of algorithmic stablecoins. Terraform Labs, a startup that Do Kwon and Daniel Shin co-founded, was the company that came up with the idea for the project in 2018. The Terra algorithmic stablecoin and the related LUNA reserve asset cryptocurrency are the two things that have brought it the most notoriety.
A temporary halt was placed on the Terra blockchain in May 2022 as a result of the collapse of the algorithmic stablecoin TerraUSD (UST) and the cryptocurrency LUNA. This event resulted in the loss of nearly $45 billion in market capitalization within a week. The bankruptcy petition was submitted by the corporation on January 21, 2024.
Terra is a blockchain that is used to power a payment system by utilizing stablecoins that are pegged to fiat currency. A proof-of-stake codesign is utilized by the Terra blockchain in order to achieve consensus. The Terra protocol serves as the foundation for a number of stablecoins, one of which is TerraUSD. Prior to its demise in May 2022, TerraUSD was the third largest stablecoin in terms of market capitalization. There is a fully operational ecosystem of decentralized applications (also known as DApps) on the Terra blockchain. Some examples of these applications include Anchor, Mirror, and Pylon, all of which make use of the stable-coin infrastructure that Terra provides.
As an example, the cryptocurrency known as TerraUSD (UST) was pegged to the United States dollar. Terra is a group of algorithmic stablecoins that were given their names based on the currencies to which they were assigned. In addition to serving as the primary supporting asset for Terra, LUNA was also utilized as a governance token inside the Terra community, allowing users to vote on various proposals. Stablecoins issued by the United States Treasury were not backed by U.S. dollars; rather, they were supposed to use a complicated concept known as "burn and mint equilibrium" to keep their peg. This approach makes use of a two-token system, in which one token is intended to maintain stability (UST), while the second token (LUNA) is intended to provide a buffer against volatility.
An application for lending and borrowing that was constructed on top of the Terra chain was known as the Anchor Protocol. Those investors who had placed UST in the Anchor Protocol were eligible to receive a yield of 19.45%, which was given out from Terra's reserves. A number of critics expressed their fear that Kwon's stablecoin concept could operate in a manner similar to that of a "ginormous Ponzi scheme" due to the huge yield it offers. An further project on the Terra network was called Mirror Protocol. It was supposed to "mirror" traditional listed stocks and offered financial derivatives that were designed to mimic such stocks.
The year 2018 marked the establishment of Terraform Labs in Seoul, South Korea, by Do Kwon and Daniel Shin, who is also known by the name Shin Hyun-sung. 2019 marked the year that Terraform Labs introduced its very first cryptocurrency token. Many investment firms, including Arrington Capital, Coinbase Ventures, Galaxy Digital, and Lightspeed Venture Partners, contributed more than two hundred million dollars to Terraform Labs' fundraising efforts.
Do Kwon was appointed to the position of director of the Luna Foundation Guard (LFG), which was created as a non-profit organization in Singapore in January of 2022. The Luna Foundation Guard was given a piece of the profit that was made from the sale of UST by Terraform Labs. This portion was intended to be utilized as reserves in order to maintain the price of UST. LFG had reserves of 80,394 bitcoins worth around $2.4 billion as of the 7th of May, which was soon before UST announced that it would break its peg. The main percentage of the reserve was comprised of Bitcoin; however, LFG also held a variety of other stablecoins and cryptocurrencies.
Terra and the Washington Nationals Major League Baseball team made the announcement in February 2022 that they had engaged into a sponsorship partnership. The agreement included the branding of the stadium and television, as well as the rebranding of the Washington Nationals club and lounge as the "Terra Club." An undisclosed "sports franchise in one of the four major American professional sports leagues" was the only thing that Kwon mentioned when he first pitched the arrangement to the Terra community. The community agreed to pay $38.15 million for an exclusive agreement that would last for five years.
Kwon and Shin, the two founders of Terraform Labs, each owned one share of the company, which meant that each founder had fifty percent of the controlling power. Kwon later extended his stock pool to eleven shares, giving him 91.7% ownership and Shin the remaining 8.3%. Shin and Chai Corporation, a Terra-ecosystem payment service company that he formed, revealed on 18 May 2022 that Shin no longer possessed any ownership equity in Terraform Labs. Chai Corporation announced that Shin was not able to "finish liquidating his remaining ownership in time" despite holding the same share of ownership as of the 18th of May. This was despite the fact that the Singaporean Account and Corporate Regulatory Authority disclosed that Shin still had 8.3% of the ownership of Terraform Labs. Furthermore, the records obtained from the Singaporean government disclosed that as of the 18th of May, Shin had 51.2% of ownership of Chai Holdings, which is the parent company of Chai Corporation, and Kwon held 22.4% of ownership.
The tokens began to make headlines on May 9, 2022, after the United States Treasury began to decouple its tie to the United States dollar. Over the next week, the price of UST sank to 10 cents, while LUNA fell to "virtually zero", down from an all-time high of $119.51. Before the crash, LUNA was one of the top ten largest cryptocurrencies on the market. The crash wiped off roughly $45 billion in market capitalisation in one week. Terra-Luna conducted its operations using a protocol for a two-coin system that did not have the conventional collateral backing. The collapse of the company was most likely brought on by an assault on its liquidity pool, and it was made possible by weaknesses in the blockchain infrastructure that was underlying the system.
Due to the steadily declining values of UST and LUNA, Terraform Labs made the decision to temporarily cease the operation of the Terra blockchain on May 13th. In spite of the fact that the corporation made an effort to stabilize UST and LUNA by utilizing its bitcoin and other cryptocurrency reserves from the Luna Foundation Guard, they were not successful in reestablishing the 1:1 peg of UST to USD. As of the sixteenth of May in the year 2022, blockchain specialists assert that the expenditure of the LFO bitcoin reserves is continuing to be a mystery.
A number of factors, including widespread withdrawals from the Anchor Protocol in the days leading up to the collapse, investor concerns over cryptocurrencies in general, and a decline in the price of bitcoin, are likely to have contributed to the collapse. As a result of holders converting UST into LUNA through the mint-and-burn method during the collapse, the price of LUNA dropped as a result of the increased supply of LUNA. This, in turn, caused the system that maintains a balance between the currencies to become unstable.
On May 25th, a proposal was authorized to reissue a new cryptocurrency known as LUNA, as well as to detach from and abandon the cryptocurrency known as UST, which had lost its value. Terra Classic is the name that has been given to the original blockchain, and the LUNA token that was initially used is now known as LUNA Classic (LUNC). The new LUNA coin, which speculators refer to as "Terra 2.0," has experienced a decline in worth in the first few days after it was brought to the attention of exchanges.
Do Kwon, the founder of Terra, stated that his faith in the company "seems super irrational" in an interview that took place in August 2022 on the NFTV series Coinage. This interview took place several months after the collapse of Terra. In spite of this, he refuted the notion that the Terra system was a Ponzi scheme.
Kwon made an effort to travel to Dubai on March 23, 2023, using forged passports from Costa Rica. He was also carrying forged travel documents from Belgium. However, he was brought to the attention of authorities at Podgorica Airport in Montenegro, where he was apprehended. Kwon was ultimately charged with eight offenses by a federal grand jury in Manhattan. These accusations included conspiracy, securities fraud, commodities fraud, and wire fraud. KBS News reported the following month that before to the collapse of TerraUSD, Kwon had sent 9 billion won to the law firm Kim & Chang, which is equivalent to $7 million in United States dollars.
Terraform Labs filed for bankruptcy under Chapter 11 in the United States on January 21, 2024, listing assets and liabilities in the range of $100 million to $500 million.
According to The Straits Times, the firm that is responsible for Terra, Terraform Labs Pte. Ltd., is incorporated in Singapore; nevertheless, the company did not submit an application for a licensing under the Payment Services Act. There is also the fact that it is not a notified entity, which indicates that the Monetary Authority of Singapore has not provided it with a temporary exemption from the requirement to hold a licence. According to the records that Kwon...
