How can Terra – Luna be rescued?
Following the de-peg of Luna and the demise of stablecoin UST last week, Terra co-founder Do Kwon unveiled a proposal called the “way forward.” This includes turning the Terra chain into a new chain without an algorithmic stablecoin, with the old chain being called Terra Classic (Luna Classic token – LUNC) and the new Terra chain (Luna token – LUNA).
In the report “How can Terra be rescued?”, Huobi Research Institute analyzed the major difficulties in the revival plan and raised the question of the distribution of new tokens.
For example, it is not clear why 25% and 10% of new tokens will be airdropped at the time of the new proposal launch to investors who are holding UST and LUNA, as this will only benefit those who already hold UST and LUNA, hold either of these tokens over time, investors who recently purchased UST or who bought LUNA after the hyperinflation. The year-long plan with a competitive process also fails to address the oversupply of supply and sale, which will likely make new investors unhappy.
Huobi Research Institute researcher Jet Li, author of the report, said: “Although the Terra ecosystem has attracted a number of research and developer teams, we anticipate there will be obstacles in the way. significant reluctance to start a new chain, due to the proliferation of existing UST and LUNA debt holders. With Terra’s reserves depleted and no new funding in sight, it remains to be seen where the value will come from with the fork.“
In the report, Jet Li proposes two alternatives. The first is inspired by the Bitfinex hack in 2016, where a new fork would be replaced by a token rally in the form of an IOU. However, unlike Bitfinex which was legitimately hacked and lost funds with the potential to be recovered, much of the money lost during the most recent crisis stemmed from the destruction of capital.
The second solution is to combine a new fork with a fundraising, where new tokens will be issued to developers, LUNA holders (at the time of depegging and at the end of the old chain), as well as angel investor. This will value the new chain at a valuation of $3-5 billion and aim to raise $1-1.5 billion from angel investors who will be motivated to seek an edge in net.
If LUNA were to follow a playbook modeled after U.S. Federal Bankruptcy law (e.g. Chapter 7 or Chapter 11), then LUNA would have to liquidate all assets for distribution to investors. is holding UST (resulting in significant capital destruction), or is facing scrutiny over the money that could be raised to save the Terra ecosystem with the new project.
“At the end of the day, there is no easy solution to the destruction of the already existing capital,” commented Li. “There will be a long way to go to restore the entire Terra ecosystem.”
See the full report here.
About Huobi Research Institute
Huobi Blockchain Application Research Institute (referred to as “Huobi Research Institute”) was established in April 2016.
Since March 2018, Huobi Research Institute has been committed to comprehensively expanding the research and exploration of various fields of Blockchain, thereby contributing to accelerating the research and development of Blockchain technology, promoting Blockchain application and optimization of Blockchain ecosystem.
Huobi Research Institute will focus on researching industry trends, technology development trends, application innovation in the field of Blockchain, etc. At the same time, Huobi Research Institute will also cooperate with governments and businesses industry, universities and other institutions to build a complete Blockchain research platform.