Since the TerraUSD stablecoin collapsed a few days ago, the team behind this project has been working on a solution and finally announced it
TerraUSD Crash
The price of the stablecoin, which was supposed to be algorithmically maintained at $1 per TerraUSD, is now around 11 cents. Trading volumes have also fallen dramatically as more people exit the coin.
TerraUSD experienced a meltdown that sent shockwaves throughout the crypto markets, triggering a selloff. Once its price fell below $1, it caused a panic in the market that led to panic selling at record levels. The selloff also rendered the Terra Luna coin worthless, at below 1 cent per coin. Luna, which at one point had a market cap of $41 billion, now has a value of around $1.4 billion and falling.
How the Rescue Plan will Work
At the heart of the rescue plan is the creation of a fork, which means taking the existing code that makes up the project, and coming up with an updated version. In the planned update, the team plans to get rid of algorithmic price stabilization. Instead, a billion tokens would be sent out to existing holders of Luna, and TerraUSD, as well as developers.
Luna Foundation Guard, the organization that manages the TerraUSD stablecoin, revealed that in its reserves, it holds 313 Bitcoin, which are valued at around $9.3 million at current prices. On May 7, the foundation held 80,400 BTC, valued at around $3.5 billion. It sold most of these funds as it attempted to defend the value of TerraUSD. The group still has assets valued at around $106 million, which it plans to use to compensate the remaining holders of TerraUSD, starting with the smallest holders. However, no details of the compensation plan have been revealed.
The announcement did not do much for the wider crypto market. Since the revelation, most of the top 20 crypto coins have continued to perform dismally. The current downturn in the crypto market has increased the attention of regulators in the US. Since his inauguration, President Biden’s administration has shown a key interest in regulating the crypto market. Officials in the Biden administration state that the recent market meltdown caused by a single stablecoin is a clear sign there was a need to regulate the crypto markets.
With several mainstream firms having invested in crypto in recent times, many are worried that it could have a knock-on effect on the traditional financial markets. Regulators in the US warned investors that crypto markets were highly volatile and highly speculative. They note that these assets lack disclosures regarding the issuers of equities or the debt providers.
Will Forking Work?
Once the fork is complete, the new chain will be called Terra, with a native token called LUNA. The team will rename the old chain Terra Classic, with its native token being renamed Luna Classic (LUNC). All holders of LUNC and residual TerraUSD holders will receive new tokens via an airdrop, as well as essential developers.
Additionally, the Terraform Labs’ wallet will be eliminated from the airdrop, which will make Terra a fully community-run chain. The Terra community plans to participate in a governance vote on May 18, 2022, to determine the future of the blockchain.
The plan has already received opposition from industry leaders such as CZ, the Binance CEO. They do not believe that forking is a solution to the Terra problem. For instance, CZ noted that forking would not bring about any value to the fork. Additionally, it was impossible to avoid all transactions on-chain, and off-chain, such as on exchanges. Besides, he raised issues about what happened to all the Bitcoin that was supposed to be used as reserves.
