The crypto community has not yet recovered from the collapse of Terra (Luna). These events had a negative impact not only on the project but also on the entire crypto market. Investors lost over $40 million and Terraform Labs' credibility was gone forever. However, against the backdrop of all these events and the backlash from the community, Terra Co-Founder Do Kwon took a desperate step. He restarted the network under the new name Terra 2.0 (Phoenix-1).
The new network was launched on May 28, immediately after a hard fork. The token of the “revived” network kept its former name Terra (LUNA), while the original one was renamed Luna Classic. The community negatively received this move, and the company faced a lot of lawsuits. Together with experts, we try to figure out why the launch of Terra 2.0 was needed at all and whether Do Kwon achieved his goal.
Why was Terra 2.0 launched?
The launch of the new network is part of Terra Co-Founder Do Kwon's plan to revive the failed project. According to his idea, new tokens should be distributed among the affected users. However, in the crypto community, this idea was perceived extremely negatively. We asked the experts if there was any practical point in restarting the network and the Terra 2.0 token, and how, according to Do Kwon, this was supposed to save the day?
Valeriy Kabisov, Senior Developer at Rain.bh, a crypto exchange for the Middle East markets, notes that the Terra community was considering various recovery options. But in decentralized systems, it is impossible to reach a consensus: some groups are for a hard fork, some people would like to leave everything as it is, others would launch a new network without reference to the previous transaction history. As the main rescue option, before the events that led to the collapse of LUNA and UST, a hard fork was considered on a certain block. It was supposed to save all balances and start from block zero, erasing all transaction history. This would allow you to boot from your last “good save”, in terms of computer games. But the decision was greatly influenced by the opinion of Binance CEO Changpeng Zhao, who opposed the fork. According to him, the fork will not create any value, and the exchanges already have a history of transactions and trades that cannot be erased.
The creation of the project from scratch suited most of the groups that had their say in the success of the project. Among them were the largest exchanges, which made it possible to obtain huge liquidity at the start and increase the chances of a successful restart of the network. And to ensure this liquidity, it was decided to produce an airdrop of new tokens.
Venera Shaidullina, Professor of Financial University under the Government of the Russian Federation, comments on the current situation, saying,
“On May 13, Do Kwon came up with an innovative proposal to form a new branch in the Terra blockchain and distribute 1 billion tokens among holders, including UST holders—based on a snapshot that was taken even before the token was unlinked from the dollar.
“But unexpectedly, he met criticism from Changpeng Zhao and the network's lead validator Jiyun Kim. According to the CEO of Binance, such a fork will not entail recreating the value of the token. In turn, Kim generally took a revolutionary view. He proposed to the community to unite in order to create a new blockchain network.
“So, discord within the team did not inspire hope for a brighter future for the holders. Some investors have already turned to the police with statements, and the creator of the ecosystem is likely to be dragged for interrogations soon.”
Analyst Aziz Kenzhaev has his own opinion on this matter. He says,
“I believe that everything that happened with Terra was not without human intervention. I can’t say with certainty that there was a conspiracy of the ‘Illuminati’, but an artificially created collapse exists in this case. Therefore, claiming that the mechanism broke, but we fixed it and now everything works much better, is a grand strategy for Kwon at the moment.”
Speaking about the reasons for the launch of Terra 2.0, Dmitry Noskov, an expert at the StormGain crypto exchange, notes that by this action the developers wanted to create a new ecosystem in order to give a “second life” to the project. This was done largely in order to save his crumbling reputation. However, according to the expert, users are not convinced.
Anton Bykov, Senior Analyst at Esperio, notes that any crypto project keeps afloat solely due to the trust of the community. Clearly, relaunching Terra doesn't make sense in terms of building the infrastructure that will propel the industry forward. In fact, even the first iteration of the project was not fitting for this role. There was no demand from the community for another analogue of Ethereum, as evidenced by the almost complete absence of life on the network. Except, of course, Anchor Protocol, whose adventure with UST created the illusion of activity and success.
Anti Danilevsky, CEO and Founder of Kick Ecosystem, believes that there is no practical sense for users in restarting Terra Luna. According to the expert, Do Kwon hopes to earn more money and pay the debt out of it. But money is not taken out of thin air, and the latest release is another pyramid scheme. After all, the main sign of a Ponzi scheme is that money is paid to those who came first from the money of those who come later and those brought in by the first. Therefore, this has always been a pyramid. However, the network has its "fans" and probably the same fate awaits them as the first time.
Vladimir Gorgadze, head of the Blockchain Master’s program at MIPT, head of tokenization projects at MMC Norilsk Nickel, head of Newity, a blockchain solutions developer, notes that the tokenomics itself and the implementation of the Terra ecosystem were quite good–an algorithmic stablecoin with support for exchange rate by transferring the second coin. The capitalization of UST reached $18 billion, and the capitalization of Luna exceeded $40 billion. It would have worked well if the capitalization of the Luna coin had been growing organically along with DeFi projects with the average market interest rate. But the aggressive policy of Terraform Labs actually led to the construction of a pyramid by attracting an audience to projects with a profitability significantly higher than the market one (20%). After the fall of the pyramid (yes, they were helped to fall, but still), trust in the Terra ecosystem was lost.
The expert adds,
“I see no practical point in restarting. The restart looks like a desperate attempt to recover at least some funds, giving hope to desperate investors and attracting funds from new investors to build another crypto pyramid. The whole ecosystem initially looked like an attractive pyramid scheme with its offer of 20% per annum, with no justified sources of income for such payments to investors. The idea behind Terra 2.0 is exactly the same. Why should anyone think that the pyramid will be more stable this time?”
Ivona Gutovich, Director of Green Crypto Processing for Russia and Eastern Europe, expresses her opinion on this matter, saying,
“It is completely incomprehensible why a restart of Terra is needed: miners are not interested, small developers have already fled to other networks, and there are very few enthusiasts left in the network. The flow of big money is not expected, since large players will not get involved with a project that has compromised itself, and retail investors have already been robbed. Apparently, the history of the new token has already ended. A week after the release, speculators have played enough with it, while all those who received the airdrop have managed to drop coins and get their crumbs from the previously available funds. There is simply no point in the future life of the token.”
Artem Barger, Academic Supervisor of the Master’s Program in Blockchain at MIPT, Chairman of the Expert Council of the “Idea” Research Center, notes that the restart of the Terra project—in fact, the creation of a token from scratch—is an attempt by developers to clear the project of past shortcomings and just start everything from the beginning. In fact, Kwon is creating a completely new blockchain network, abandoning the hard fork starting from the zero genesis block, which, apparently, he believes will allow him to reset the history associated with the previous version.
The expert reminds that Terra 2.0 will be based on the LUNA token, while the previous token has been renamed LUNA Classic. Kwon is going to distribute new LUNA tokens among the victims. Unfortunately, the distribution is far from optimal and for those affected by the fall, it looks more like a slap in the face. The general mistrust that has arisen towards algorithmic stablecoins after the fall of Terra does not allow building optimistic forecasts about Terra 2.0. So, for example, at the time of launch, the price of the token was about $0.00016. Although Kwon, most likely, expected to create a compensation mechanism that was supposed to at least compensate for the losses, alas, the facts indicate otherwise, and a restart is unlikely to change the situation for the better.
Ivan Petrov, a professional investor and crypto trader, recalls that the essence of any business project or commercial company is receiving financial profit. That is, carrying out any project activity, a company or person plans to bring a certain benefit to the market—to solve specific market problems, and, as a result, earn money for themselves. It's normal, and that's how the economy works. In the classical version of the economic model, as a rule, if there is no actual benefit, there is no money earned. The technology and the very structure of the cryptosphere allows you to bypass many of the traditional laws of the economy quite easily. Many projects based on cryptocurrency technologies, in fact, are not within the cryptocurrency realm. In the cryptocurrency world, it is very difficult to audit an individual company or project and thereby confirm or deny the relevance and economic feasibility of the project, the competence of its management, and even more so, immediately get some benefit. Often in the business model of companies associated with cryptocurrency technologies, there is a delayed effect: you give money now and get benefits later.
If we talk about the benefits of stablecoins, of course, they exist and should not be underestimated. As they say, they are the most "stable" thing in the cryptocurrency world. The last statement is debatable. Each individual cryptocurrency is very volatile only relative to fiat currency, but, as a rule, not volatile at all relative to itself. Any stablecoin was created primarily as a commercial project, and the purpose of its creation and technical support is to extract direct commercial benefits by the issuing company.
The expert adds,
“The whole practical point in restarting the network and the Terra 2.0 token for its creators is that they can earn money, and, if possible, create some benefit for the community. It will be quite problematic to do this, since the community's trust in Terraform Labs and Do Kwon has been lost. Nevertheless, there are a lot of speculators who will be happy to "short", speculate and manipulate any assets. The main thing for them is that the asset is popular, and that there is a large amount of liquidity in it at the moment—the ‘crowd’s’ money. It is the demand for speculation that will satisfy all the largest exchanges, which gladly listed the Terra 2.0 token on their platforms”.
Alexander Nikulin, Sales Director of EMCD, the largest mining pool in Eastern Europe, notes that a hard fork implies a simpler and faster solution to the problem that arose in early May on the Terra Classic network.
“Many network members suggested simply burning 7 trillion issued LUNC tokens. This, however, could not save the situation in any way, since the smart contract that ensured the stability of the UST is still working, and it is able to ‘print’ even more LUNC if necessary. It is possible that in the future the project team will return to the Terra Classic network and, under normal conditions (without the need to stabilize the system as soon as possible), will normalize the network. The Terra 2.0 network is essentially a backup of the original network prior to the implementation of UST.”
Speaking about the practical significance of Terra 2.0, Vladislav Utushkin, blockchain enthusiast, CEO of TTM Group, notes that inside the new token is a completely new Phoenix-1 network. The key changes are greater decentralization and the rejection of the use of algorithmic stablecoins in order to reduce risks to the system. According to the expert, token inflation will be strictly regulated, and staking will be 7% per annum. Initially, about 30% of the tokens will be distributed, and their further release is planned for the next 2 years. The new token was received by the owners of the old “Terra” during the airdrop. The goal is to compensate for the losses of investors after the recent fall.
Artem Ibragimov, Cryptocurrency Portfolio Manager Cresco Capital, believes that Terra 2.0 is not an attempt to resume the project, but to make interest payments after the collapse of the exchange rate by a holder of Luna and UST tokens. But, as the developers promise, they will finalize and update the protocols so that the situation does not happen again.
Loss of investor confidence in Terraform Labs
All these events have negatively affected the reputation of the project, which is important in the crypto industry. Due to the collapse of LUNA and UST, trust in Terraform Labs and Do Kwon was lost. According to many members of the crypto community, launching a token on the “ruins” is not the best idea, as this will “bury” a new project in its infancy. We asked the experts if it was possible to say that the Terra 2.0 network token was doomed to failure from the very beginning and why the idea itself was sharply criticized by the community.
Valery Kabisov emphasizes that the collapse of LUNA and UST was caused precisely by problems with the UST algorithmic stablecoin and Luna Fondation's mistakes in trying to maintain the UST peg to the dollar, and not by blockchain problems. Therefore, the value of the Terra project itself remains very high. According to the expert, all the advantages that made it possible to take a leading position and attract third-party developers in dApps remain in the new project. Many decentralized applications that were created for the project of the first version, with minor changes, will work in the second version. The team that implemented a very successful project will continue to develop a new one.
Artem Barger believes that the restart is doomed to failure for several reasons. First, due to the loss of trust directly in the developer himself, who for a long time ignored warnings about a possible attack on the algorithmic stablecoin. Second, the restart strategy and the distribution of tokens by airdrop does not allow to compensate for the losses fully, which only spurs skepticism and aggravates the general situation. For example, many who received the compensation tokens rushed to get rid of them almost in the very first minutes in order to get at least some amount of money back, and, as practice shows, they did the right thing, since the collapse of the price of the new token did not take long and already in the first week its value dipped by several orders of magnitude from the initial one.
Dmitry Noskov is sure that, most likely, it will not be possible to revive the project. It suffered too significant losses, first of all, of course, reputational ones. And the crypto community sees no prospects for its revival.
Artem Ibragimov agrees that it will be very difficult for the developers of Terra to restore the trust of the community. He notes,
“Unfortunately, most people get into crypto just to multiply their investment. They do not delve into the essence of the project, or do it superficially. Mostly, they listen and read ‘experts and analysts’ and follow them. Therefore, the credibility of the project will appear if trust appears among the experts.”
Venera Shaydullina comments on the situation, saying,
“The community reacted negatively to Do Kwon's idea to launch Terra 2.0 in the first place because it basically lost a lot of money. The creators and their team do not offer a refund with their new solution, no! They only offer the idea of a restart, but, of course, no one gives any guarantees.
“In addition, it is necessary to take into account the current situation in the world. Now stocks and cryptocurrencies have decreased in price, and another collapse has begun. What are the chances that Terra 2.0 will give users back their savings? What are the chances that it will grow to the desired level? That's right, they are zero. It is also necessary to consider the fact that the crypto industry to a great degree is built on word of mouth. And after the well-known events, it is unlikely that investors will trust the creators as before.”
Vladislav Utushkin recalls that already on the first day of trading, the token lost almost 80% of its price. Users hurried to compensate for their losses and exit the project. This behavior is understandable since most investors associate Terra with the biggest failure in the history of the crypto market. Terra 2.0 is not a token which is not sustainable and innovative enough to qualify for recovery seriously. Another negative point was the problems with the law of the founder of the Do Kwon project in two jurisdictions at once—the United States and South Korea. Disproportionately high risks, not backed by corresponding growth opportunities in the long term and disappointment on the part of most of the coin community does not allow for positive predictions regarding Terra 2.0.
Vladimir Gorgadze believes that if the market were actively growing, then the project could expect short-term success simply thanks to newcomers. But the cryptocurrency market, like the stock markets, is stagnating. There is no reason why the project would be successful. Experts are well aware of this and not unreasonably sharply criticize Do Kwon.
Alexander Nikulin takes an alternative position. The expert is sure that to say that the project is "doomed to fail" is not a good idea. In fact, Terra 2.0 is the same Terra, which at the end of 2021 hit highest-ever and brought thousands of percent of returns to investors. Despite technical difficulties in May, the network is stable, as are most of the applications that migrated to the new network from Terra Classic. The decision to go to other networks was taken by a few, since it is technically very difficult to implement (to rewrite the entire source code for another network from scratch). At the moment, the LUNA token is trading on the bottom just because of the reputational blow, but in the future, the altcoin may show good profitability.
Aziz Kenzhaev agrees with the opinion of the previous expert, saying,
“I believe that the project is not doomed. There will be investors, funds and everything will be reborn. ‘Phoenix-1’ should not let you down, although the prefix 1 is a little confusing. Criticism from the community is justified only by the collapse that occurred with the LUNA coin, which dragged all cryptocurrencies down. As I said earlier, the creation of another project even based on the same blockchain, Terraform, would be much more expensive.”
Anti Danilevsky also shares his opinion with the readers of our magazine, saying,
“I think that there are plenty of greedy people, and many will strive to earn money in this pyramid. And failure—yes, is inevitable eventually. I think it's early. I have repeatedly spoken about this - both at the first launch and before the second.
“My opinion is confirmed by the decisions of the regulators: for example, not so long ago, the South Korean authorities announced the tightening of regulation of cryptocurrency exchanges against the backdrop of the collapse of Terra Luna.”
Anton Bykov notes that LUNA's trajectory speaks for itself. According to the expert, this token has no value other than speculative. Soon the project will disappear from the radar just like other "great" protocols like Neo and NEM. Perhaps, by launching version 2.0, Do Kwon planned to compensate for the losses of investors to a degree or the illusion of attempts to at least slightly reduce the level of hatred towards him, but this was not destined to happen. There may have been an attempt to repeat history with Ethereum Classic and Ethereum, but there was no such heat of passion during the fork of these networks.
Why Major Exchanges Supported Terra 2.0
Surprisingly, despite the hype surrounding Terraform Labs, many major exchanges such as Binance, Kucoin, FTX and Bitfinex have listed Terra 2.0. We asked the experts why, despite the risks for users and the general negative background, the exchanges had supported the project.
Artem Barger, Academic Supervisor of the Master’s Program in Blockchain at MIPT, Chairman of the Expert Council of the “Idea” Research Center, notes that since many large exchanges had previously invested in the Terra project, it was quite expected that they would take a step to host new Terra 2.0 tokens to allow for increased liquidity and investment inflow into the new token. Unfortunately, the result of reputational costs outweighed. And this move did not save the situation since the prices for new tokens, as well as direct interest in them, are still falling.
Anton Bykov, Senior Analyst at Esperio, assures that there is no need to look for some secret intent in the appearance of the token on the exchanges. First, investors have already been robbed once—why not do it a second time, if there are those who are interested? Second, this token had to be credited to users, so it had to be listed.
Dmitry Noskov, an expert at the StormGain crypto exchange, notes that trading platforms do not bear serious responsibility for what assets they place with them. For them, it is often just a hype story. The genuine state of affairs is reflected in the position of investors in that they purchase tokens or do not.
Vladimir Gorgadze, head of the Blockchain Master's program at MIPT, head of tokenization projects at MMC Norilsk Nickel, head of Newity, a blockchain solutions developer, emphasizes that exchanges act in their own interests, sometimes masking their actions with concern for investors.
“The business model of the exchange does not depend on whether the asset falls or rises. The commission income from trading will accrue, anyway. Indeed, the listing of Terra 2.0 can be justified by the argument that investors who suffered losses from the collapse of Terra 1.0 need to at least partly make up for their losses. But at the expense of whom will they replenish them? At the expense of new, less experienced investors. Seems unethical, to say the least.”
Valery Kabisov, Senior Developer at Rain.bh, a crypto exchange for the Middle East markets, explains that exchanges earn on commissions.
“The more popular the project, the more transactions and the more volume is traded. Coins like Shiba Inu carry a lot more risk and a lot less value. However, all exchanges have listed this coin, and it makes no sense to refuse to list the new coin of the Terra 2.0 project. Despite all the problems, the project and the team have every chance to restore capitalization successfully. A similar story was with Etherium and The DAO. This did not stop Etherium from becoming one of the most popular projects.”
Alexander Nikulin, Sales Director of EMCD, the largest mining pool in Eastern Europe, does not see any risks in the listing of new LUNA tokens. According to the expert, the situation is the opposite. The risks would be high if the exchanges did not list new tokens. TFL proposed a specific network recovery plan that can be implemented quickly and all the problematic moments can be mitigated—to stabilize the price of the native token and prevent downtime in the work of decentralized applications. There were many users on the exchanges at that time who held the old LUNA or UST token. And they were waiting for a new airdrop as compensation. If the exchanges had not supported the Terra 2.0 drop, then, in fact, they would have let their customers down, and they were already in a difficult situation.
Venera Shaidullina, Professor of Financial University under the Government of the Russian Federation, believes that the exchanges listed the new LUNA token because they were trying to support the project, as they still believe in its success. For example, BNB Chain Investment Director Gwendolyn Regina commented on the situation that the Terra project had many talented people, and their foreign policy was aimed at helping such people develop.
Ivona Gutovich, Director of Green Crypto Processing for the Russian Federation and Eastern Europe, notes that the main goal of relaunching Terra was an attempt by the founder to somehow whitewash his reputation, which, obviously, ended in nothing. Crypto-exchanges placed new coins as part of the upcoming airdrop, so as not to miss the opportunity to earn on overconfident traders once again, especially in the context of a prolonged consolidation in the market.
Anti Danilevsky, CEO and Founder of Kick Ecosystem, gives his assessment of the situation with the listing of the new LUNA on crypto exchanges, saying,
“Despite the hackneyedness of this expression, in this case it is very relevant. That's why money doesn't smell to them.”
Vladislav Utushkin, blockchain enthusiast, CEO of TTM Group, also shares his opinion on this matter, saying,
“I would venture to suggest that the main goal of the updated project is to enable large investors to compensate for part of their losses with the liquidity attracted by the Terra 2.0 hype. However, the listing happened on many major exchanges. The reasons for this can only be guessed—solidarity with Do Kwon, unwillingness to miss out on potential profits or trust in a new project. Anyway, Terra 2.0 is, albeit a very short, but bright continuation of the UST scam story.”
Analyst Aziz Kenzhaev is sure that if Terra had left without returning the coins of a closed ecosystem, then it would have had big problems, for Do Kwon in particular. According to the expert, one of the main reasons for launching Terra 2.0 is protection from regulators’ attacks. The exchanges “supported” the project, since such a negative background and an angry crowd of disgruntled users would be bad for the crypto platforms.