Terra’s collapse turns into bitter war

Do Kwon and the Terra community keep coming up with revival strategies, but not everyone is happy, including Changpeng Zhao.

Half moon

Last night, Terra’s disgraced CEO Do Kwon took to Twitter to announce the Terra Ecosystem Revival Plan 2, proposing to fork the Terra chain and abandon UST altogether. The old chain would then be known as Terra Classic, with LUNA Classic as its token, and the continuation would go by the old names, Terra and LUNA.

The new LUNA would be airdropped across LUNA Classic stakers and holders, residual UST holders, and Terra Classic essential app developers, excluding the wallet belonging to Terraform Labs.

Responding to questions under the Twitter thread, Kwon added that Terra’s new strategy had been shared with “major exchanges” so exchange-based holders could also participate in the airdrop.

New kind of failure

The proposal comes only a week after it became clear Terra's UST stablecoin was in deep trouble, but that week was exceptionally eventful, even for a space as dynamic as crypto.

When crypto projects collapse, founders often go underground, and the community, crestfallen and empty-handed, sooner or later disperses. As Do Kwon fell silent and the price of UST and LUNA kept plunging, many expected Terra to go down the same road. The only difference would have been the scale of the losses, which in the case of Terra rose to approximately $42 billion, according to a crypto data company Elliptic.

But the largest crypto failure in recent history unfolded differently. On May 11, Do Kwon broke his silence and endorsed a community proposal to accelerate the minting of LUNA. He admitted there was trouble, but stopped short of giving up on UST’s dollar peg.

Three days later, he conceded that “UST in its current form will not be” the decentralized money he believed in, adding that he was “heartbroken about the pain” that his “invention” had inflicted on the crypto world.

Meanwhile, CoinDesk broke the story that Do Kwon had been involved in an earlier algorithmic stablecoin, Basis Cash (BAC), which launched in 2020 and tanked a few months later in a pattern similar to the one that brought down UST.

Kwon has not yet addressed these allegations.

Builders first

Kwon defended the plan as a way to get the Terra developer community back on its feet, prioritizing builders with “immediate emergency allocation” of the new LUNA tokens.

Kwon has called on Terra developers to signal their support for the fork, and has received positive feedback from Aperture Finance, RandomEarth, Valkyrie, and Smart Stake, among others. The plan will be put up for a governance vote on Wednesday. If it passes, the fork will be performed on Friday, May 27.

But a brief look at crypto Twitter is enough to see that not everyone is on board. In a preliminary vote, 90% of voters rejected the proposal as of this writing. The Terra Builders Association, which was formed in the aftermath of the crisis, argued that developers should be rewarded with more chain ownership and that a whale cap should be put in place to limit the impact of big players.

CZ has concerns

The Terra Ecosystem Revival Plan 2 did not go well with Changpeng Zhao, who repeatedly criticized Terra’s decisions and explicitly questioned the value of forking. Responding to the latest proposal, CZ tweeted a resigned “SMH.”

CZ has been particularly vocal in his criticism of Terra’s breakneck LUNA minting strategy, suggesting that Terra should instead “restore the network, burn the extra minted LUNA, and recover the UST peg.”

Binance itself has come under fire for delisting UST and LUNA days after it became clear that the network was overwhelmed. Shortly after that, the exchange listed Terra’s tokens again, admitting that “there is progress,” even as Binance CEO warned users against indiscriminate trading of Terra’s tokens and advised “EXTREME caution.”

Faced with mounting suspicions regarding Binance’s position in the crisis, CZ confirmed that in 2018, over two years before the advent of the UST stablecoin, Binance invested $3 million in the layer 0 Terra blockchain. As a result of that investment, the exchange received 15 million LUNA, which is now held in the same wallet as $12 million worth of UST Binance accumulated from staking.

CZ did not disclose the transaction fees Binance had earned from LUNA and UST trading carried out as Terra collapse was underway.

LFG reserve movements revealed

Aside from the controversy around forking, the crypto community has called on Terra to reveal the details of the transactions that drained the $3.5 billion Luna Foundation Guard reserves, which came under intense scrutiny after an Elliptic investigation led some to believe that the funds were used to bail out a few UST whales. The LFG has rejected these reports as false.

Yesterday, they published the long-awaited report, explaining that the reserves were used to purchase UST, then swap UST for LUNA to stake across validators in anticipation of a governance attack.

As of this writing, the wallets tagged in the Luna Foundation Guard reserve dashboard held 313 BTC, 1.97 million AVAX, 378.9 million UST worth $48.41 million, and 39,910 BNB. The remaining funds are to be used to compensate UST holders, starting from the smallest retail investors.