Monday, May 20, 2024

TerraClassicUSD: A Comprehensive Overview

Daniel Shin and Do Kwon are South Korean innovators who had the idea of launching an algorithmic stablecoin in 2018. They managed to turn this idea into reality when UST reached the market in 2020. The unique algorithm design ensured that Terra was successful for over 18 months.

However, a huge crash occurred in 2022, and the estimate is that Terra lost over $40 billion. A class action lawsuit followed in the United States and Singapore, and Do Kwon was arrested after fleeing to Montenegro. Crypto investors were surprised, and many turned their attention to other stablecoins. The most common decision was to buy USDT, as Tether is the leading token in the category.

In the meantime, Terra rebranded its two blockchain coins to USTC and LUNC (TerraClssicUSD and TerraClassic). Our experts discuss the stablecoin mechanism, its key features, and the 2022 crash in the following sections. We’ll also discover whether the tokens and the network have enough potential to recover in the coming months or years.

Understanding TerraClassicUSD’s Stablecoin Mechanism

The first thing to understand is that USTC isn’t your classic stablecoin. It initially was, but then the huge crash occurred in 2022. That led to USTC leaving the idea of maintaining the 1:1 ratio to USD. So, if you are looking for stablecoin investments pegged directly to the US dollar, you should look elsewhere.

USTC lost the basic stablecoin features in 2022, and its price over the last couple of years confirms that. Terra applied a special mechanism that included burning and minting in the two-coin system. USTC is connected to the LUNC coin, just like UST was to LUNA.

Here’s how the mechanism works. If you want to purchase USTC, you can only do that with LUNC coins. Those tokens are then removed via the burning process, and they disappear from circulation. It also works vice versa — you can use UST to purchase LUNC, and then UST burning occurs. That mechanism had the task of maintaining the $1 coin value whenever deviations occurred.

Key Features of TerraClassicUSD

TerraClassicUSD comes with some exciting features that attract investors. Here’s a brief explanation of its top characteristics:

  • Liquidity sharing. Terra ecosystem offers this feature that ensures a simple conversion from TerraUSD to other stablecoins. The network applies minimal charges to keep the transactions affordable.
  • Dropship bridge protocol. The protocol is how TerraUSD achieves interoperability with other ecosystems. It supports moving UST to other networks, such as Solana and Ethereum. That enables using these tokens in decentralized finance and other dApps.
  • Create UST by burning LUNA tokens. The idea of a two-coin system is for LUNA to absorb any volatility that happens and ensure that UST is as close to $1 as possible. Burning LUNA tokens creates UST, and that can lead to its value exceeding the $1 value. As a result, if you hold more LUNA, you can sell coins for UST, which can be a potential investment opportunity.

Breaking Down the 2022 TerraClassicUSD Crash

Free woman stylish at illustration
Source: Pixabay

TerraClassicUSD crash pinpointed the risk of investing in algorithmic stablecoins. According to the article published in the Finance Research Letters, some similarities exist compared to the collapse of the IRON stablecoin and its TITAN token match.  

For starters, Terra was also a two-coin system, and there was also a liquidity pool attack. That attack led to UST losing its USD peg for a shirt while. The two networks also had a similar structure since they relied on particular historical variables that tend to become tenuous in volatile periods.

We can detect two primary cases that led to the Terra crash:

  • Short-selling Bitcoin. The goal was to induce panic in the overall crypto industry. Bitcoin price drop led to significant investor concerns.
  • Coordinated liquidity pool attacks. It led to de-pegging, and Terra tried to trade its reserves to protect its USD connection. However, the move was unsuccessful. 

The crash caused Terra’s price to drop to $0.0062 in June 2022, and that was the coin’s all-time low. Terraform Labs filed for bankruptcy in the United States in 2024.

Can TerraClassicUSD Recover?

Terra’s recovery plan following the crash was the creation of the TerraClassicUSD (USTC) token. USTC tries to keep its value relative to different assets, and not only the US dollar.

At this point, USTC is worth $0.025. The value didn’t grow beyond $0.06 during the last 12 months. The project’s market cap is $230 million, which is considerably lower than Terra’s capitalization at its prime.

It’s worth noting that Terra’s blockchain was divided into two separate blockchains. The new USTC is essentially a hard fork, but the two-coin system remains. The second token is Terra Classic (LUNC), which also went through a rebranding. Its current value is only $0.00013.

Experts believe that you shouldn’t write off Terra yet. In reality, it’s harder to believe that USTC will restore to the desired $1 value. It seems that restoring reputation will be even harder after the crash. A reasonable investor would hardly risk large funds with USTC when there are many better crypto investments available.

Conclusion

Terra has had an exciting journey over its few years of existence. It was all going well at the beginning, with the algorithmic stablecoin successfully maintaining its $1 peg. In 2022, a crash that other parties might have orchestrated occurred. Whoever’s behind this is irrelevant because the idea succeeded — UST lost its $1 peg.

The creators tried to respond by rebranding their two-coin system via a hard fork. That’s why USTC and LUNC exist nowadays. It’s been two years since the crash, and there aren’t signs that USTC could return to its $1 value anytime soon. While it can still be a viable crypto investment, if you are looking for stablecoins, it’s best to look elsewhere.

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