Following the collapse of algorithmic stablecoin Terra USD and the associated token Luna, the Terra community has voted on a recovery plan.
The events are summarized below:
Stage 1: Losing the peg
Terra USD (UST) first lost its peg with the dollar on May 7th following a large swap that created an imbalance in the Curve liquidity pool. This shook the confidence of the liquidity providers, who started withdrawing UST from the pool to sell it elsewhere. The stablecoin then lost its peg on other exchanges, falling below $0.90.
Stage 2: Luna flips the Terra USD market cap
As the peg of UST slipped, the price of Luna dropped. This destroyed confidence in the stablecoin because it meant that theoretically not all of the holders would be able to redeem their $1 of UST for $1 of Luna — which was a critical part of the mechanism for keeping UST stable.
Stage 3: Halting the blockchain
By this stage, the Curve liquidity pool was almost dry, and remaining UST holders had few places to sell. Thus they were forced to redeem UST for Luna. This caused an over-supply of LUNA, pushing prices below $0.01. As a result, Terra halted the blockchain to maintain security on May 12th.
Recovery plan
In the wake of the collapse, the Terra community voted on a recovery plan that project founder Do Kwon claimed can help Luna “rise up anew from the ashes”.
This resulted in the creation of a new blockchain (popularly known as a hard fork), in which the original Terra blockchain split into two chains:
1. Terra 2.0, with native token LUNA (the new LUNA token, sometimes known as LUNA2)
Terra 2.0 is the new chain that the Terra community voted to create. It will inherit the original chain’s developer pool and user base, without the algorithmic stablecoin UST.
As determined by the Terra community, the new Luna tokens were airdropped to the wallets that contained Luna and stablecoin UST before the collapse. The exact amount of LUNA received was determined by the type and quantity of tokens held, and the time-period based on snapshots taken before and after the collapse.
2. Terra Classic, with native token Luna Classic (LUNC)
Terra Classic is the original Terra blockchain. It will coexist with the new chain (Terra 2.0) and be supported by the section of the Terra community that disagrees with the revival plans and the blockchain fork. The chain’s name pays homage to Ethereum Classic, which was formed after Ethereum split in two following the DAO hack in 2016.
eToro will be supporting the airdrop of the new LUNA tokens to existing LUNC holders. Read more about this here.