Terra 2.0: A crypto project built on the ruins of $40 billion in investors' money

Terra remained the focus of the majority of headlines throughout May for its spiral collapse leading to a loss of over $40 billion in investors’ money. Despite some early resistance from the community and heavy backlash from the likes of Binance CEO Changpeng “CZ” Zhao, Terra co-founder Do Kwon managed to relaunch the collapsed network with a new chain called Terra 2.0 (Phoenix-1).

The amended proposal for the relaunch of the network by increasing the genesis liquidity, which introduces a new liquidity profile for pre-attack Luna Classic (LUNC) holders and decreases the distribution to post-attack TerraUSD Classic (USTC) holders, was approved by the community with a 65% vote in favor.

The new blockchain went live on May 28 after a hard fork. The new token stays Terra (LUNA) and the old one was rebranded to Luna Classic. With the new network launch, the holders of LUNC, USTC and Anchor Protocol UST (aUST) were eligible to receive the new tokens.

Despite industry-wide outrage against Do Kwon — the co-founder and the parent company Terraform Labs are facing lawsuits and investigations in South Korea — major crypto exchanges including Binance, Kucoin, FTX, Bitfinex and several others announced support for the Terra 2.0 chain.

Cointelegraph reached out to Binance to inquire about the reasoning behind its listing of the LUNC on its platform, especially when the market is still recovering from the after-effects of the $40 billion collapse. A Binance spokesperson told Cointelegraph:

“Binance listed LUNA on the Innovation Zone, which is a dedicated trading zone where users can trade new tokens that may have increased volatility and pose a higher risk than other tokens. Before being able to trade on the Innovation Zone, every user has to visit the web version of the Innovation Zone trading page and complete a questionnaire after reading the Binance Terms of Use.”

Binance claimed that the purpose of the Terra 2.0 was to compensate those who had lost a significant amount of funds during the crash of the main network. As a platform, “Binance decided to let people trade the airdropped tokens to realize their assets.”

CZ has also said that he is not very optimistic about the future of the Terra 2.0 ecosystem and that the decision to list the new token was based on helping investors recover some of their losses. Speaking to Cointelegraph, Zhao said:

“We still need to ensure continuity of people's access to liquidity. We have to support the revival plan hoping that it may work.”

Kraken CEO Jesse Powell also defended listing LUNA, saying it’s the community’s demand. However, he did mention that a listing doesn’t necessarily equal an endorsement for the controversial token.

Related: ​​Kraken CEO defends listing LUNA 2.0: ‘Bitcoin traders don't pay the bills’

Customer satisfaction seems to be a common concern for the continued listing fo the asset. Bitrue crypto exchange research analyst Whitney Setiawan told Cointelegraph:

“As an exchange, Bitrue’s main priority is customer satisfaction, as it’s only right that we give our Bitruers the freedom to invest in assets of their choice. We are still closely monitoring developments from the Luna Foundation Guard investigation and would take immediate action should the situation get worse.”

Terra 2.0 sees heavy volatility

The launch of the new network was nothing less than a frenzy. To begin with, many investors claimed that they were not appropriately compensated for the new airdrop. The Terra 2.0 team acknowledged the issue and said they are working to resolve the issue soon.

Many users also joked about how the new airdrop is a mockery, given that people have lost hundreds of thousands of dollars and received about $50 worth of new tokens in return:

Lost $300k in $LUNA

Got an airdrop of $59

Thank you do kwon and team

— Ash WSB (@ashwsbreal) May 29, 2022

The new airdropped token started trading across multiple crypto exchanges on May 28. However, as warned by many, the new token showed very high price volatility on the very first day of the relaunch, dropping by over 70%. Many investors who received the new LUNA started selling as soon as they received it, showing a lack of confidence in the new ecosystem.

LUNA was listed for $18.85 on the relaunch day but subsequently plummeted to $5.71 before recovering half of its losses a day before the Binance listing. The token is currently trading at $6.44, according to Cointelegraph data, nearly one-third of its listing price.

Justin Hartzman, CEO of crypto trading platform Coinsmart, told Cointelegraph, “Precaution is always better than cure. Why list a project with some very noticeable flaws, noted by many well-known folks on Twitter, and then ignore them? Exchanges must make their listing process more secure and rigid. Too much money and too many lives are at stake here.”

A user who reportedly lost a significant amount of money investing in LUNC wrote:

“I don’t see any fundamentals here & I see whatever I get as a bonus since I already wrote everything off as a loss & $0. If not that the others are vesting, I’ll sell ‘em all.”

Do Kwon has a track record of failed projects

There is a famous meme going around on Crypto Twitter that compares the fate of two fund managers, who each lost investors billions of dollars. One is Bernie Madoff, the notorious financier who was sentenced to 150 years in prison after running a $60 billion Ponzi scheme — the world’s largest — and Do Kwon, who managed to relaunch a new network just two weeks after losing billions of dollars.

In 2009, Bernie Madoff lost investors $60 billion. He was sentenced to 150 years in prison.

In 2022, Do Kwon lost investors $60 billion after Luna collapsed to $0. He then created Luna 2.0. pic.twitter.com/CkCC8AKPVR

— Fintwit (@fintwit_news) May 29, 2022

The meme highlights the lack of regulatory oversight in the crypto space, where multi-billion-dollar mistakes and scams have little to no checks or balances. 

Terra’s algorithmic stablecoin collapse was not the first time Kwon has launched a failed experimental project. At the peak of the Terra collapse saga, it was revealed that Do Kwon was also behind another failed stablecoin project called Basis Cash (BAC).

Many experts also believe that even though exchanges are liable to listen to the community and list the new token, a future project led by Do Kwon would be hard to accept. Zachary Greene, who runs crypto-investing and finance website the Greenery Financial, told Cointelegraph:

“I believe Do Kwon heading operations will hold Terra 2.0 from being accepted and seen as a legitimate reboot. Whether he was responsible for the mismanagement of the reserves or not, he seems to be blamed by the community and crypto space for the disaster that was the collapse of LUNC and USTC. In my opinion, any project with him as the lead, at least for the next few years, will be dogged on by the crypto community.”

The Terra and Terra 2.0 story is still unfolding. Whether anything malicious happened with the stablecoin or if it was just a failed experiment, only time will tell. 

Even in traditional markets, however, we’ve seen time and time again how failed executives hop from one executive position to another. It’s not shocking to see Do Kwon at the helm of Terra 2.0, but it should definitely make investors pause and think twice before investing.

What makes the case against Kwon is his reluctance to foresee the problems and act accordingly. Many have been warning against USTC’s peg being backed by volatile assets and Terra using community funds to buy Bitcoin (BTC), but most of it went unnoticed amid tall promises from the project’s management.

The Terra co-founder and the majority of the employees at Terraform Labs is currently under investigation on various charges including tax evasion, market manipulation and more. While the community can’t be blamed for approving the relaunch plan since they hoped to recover some of their funds with the airdrop, Kwon’s leading the charge once again could prove problematic for the community in the long term.