Most recent update: [June 6th , 2022]
No securities regulatory authority has expressed an opinion about the Crypto Contracts or Luna 2.0, made available on the VirgoCX Platform, including an opinion that Luna 2.0 is not itself a security and/or derivative.
What is Luna 2.0?
Luna 2.0 is the new blockchain and derivative cryptocurrency from Seoul-based cryptocurrency developer Terraform Labs. It is a hard fork born out of necessity to save the original Terra Luna blockchain from a disaster that forced the dollar-pegged stablecoin TerraUSD (UST) and eponymous LUNA coin to plummet to record lows. As it is essentially the same blockchain, Terra Luna 2.0 retains many of the same features that made the original Terra Luna project so popular, all without the embattled UST coin.
The decision to separate the original Terra blockchain into one with and without UST was made through a community vote by the blockchain’s validators, in which it passed with over 65% of voters in favor of the split. The original Terra blockchain and coin were kept, but under the moniker Terra Luna Classic (LUNC) with the new Terra Luna 2.0 inheriting the original LUNA designation.
Why was LUNA 2.0 created?
Terra Luna 2.0 was created in May 2022 in response to a major collapse in the original Terra Luna blockchain that saw the prices of the original LUNA and UST coins to initially plummet over 99%. It was initially proposed by Terraform Labs’ head Do Kwon, who believed it was the best direction to save the coin and the blockchain.
As UST is an algorithmic stablecoin, it was automatically programmed to stay pegged to the US dollar by systematically burning or minting equal parts of UST and LUNA through a series of smart contracts. While the concept was theoretically sound, the algorithm was pushed to its limits when UST was unpegged from USD in early May of 2022. This resulted in a massive inflation of the LUNA supply, of which the algorithm could not keep up, causing the catastrophic crash that forced Terraform Labs to quickly make a recovery plan.
Who founded Terra?
The original Terra was created in 2018 by Do Kwon and Daniel Shin, also the founders of Terraform Labs, the brains behind the Terra Luna ecosystem. It was initially conceived to expedite adoption of blockchain technology and cryptocurrencies with a focus on stability and user-intuitiveness. Combined, the two boast impressive resumes; Shin co-founded the South Korean e-commerce juggernaut Ticketmonster and start-up incubator Fast Track Asia, while Kwan had previously served as CEO of Anyfi, with experience as a software engineer for both Google and Apple.
Terra 2.0 and the new LUNA coin are designed to function relatively the same as Terra Classic. The blockchain facilitates stablecoins pegged to many fiat currencies, historically with the US dollar, but also with the South Korean won and other currencies like the Mongolian tugrik. The new blockchain plans to continue building on the foundations that made Terra Classic one of the most popular cryptocurrencies on the market at its peak, particularly with its ease of use and world-class UX and UI. Most dApps developed on the original Terra blockchain have already migrated or are in the process of migrating to Terra 2.0, and it retains most of the features of the original blockchain as well.
At its core, LUNA functions as collateral for stablecoins on the Terra blockchain. The blockchain utilizes an algorithm in which it mediates the price of the stablecoin in a series of smart contracts that burn or mint the appropriate amount of LUNA to keep the price of the stablecoin pegged to the fiat currency it represents. As such, the supply of LUNA is elastic, and changes based on the needs of Terra’s collateralization mechanism.
Terra is user-friendly and even more so developer-friendly; it is highly modifiable and allows programmers to build dApps in a variety of languages including Rust, Go, or AssemblyScript. To add to this versatility, developers can program additional functionality to their dApps using the network’s ‘oracles,’ off-chain sensors that can communicate data to-and-from the blockchain.
Terra 2.0’s functional token, LUNA, has a dynamic supply of 1 billion coins. The network is programmed so that should the supply ever exceed that amount, the algorithm will automatically burn tokens in order to keep the equilibrium.
During launch, existing Terra Classic (LUNC) holders were allocated Luna 2.0 in an airdrop event during the first block of the new chain on the Phoenix-1 mainnet. The airdrop allocations were as follows:
- Pre-attack LUNA holders: 35%
- Post-attack LUNA holders: 10%
- Pre-attack UST holders: 10%
- Post-attack UST holders: 15%
- Community Pool: 30% (with 10% of this allocated to developers) controlled by LUNA stakers.
To clarify, pre-attack holders are considered at a Terra Classic block dated for May 7th, 2022, whilst post-attack holders are considered at a Terra Classic block dated for May 27th, 2022.
In order to ensure full community control of the Terra ecosystem, Terraform Labs’ wallet was removed from the airdrop.
The supply of LUNA will be rolled out incrementally; at launch, there were around 210 million coins released for circulation, with the rest of the supply planned to be released sometime later this year. Terra is also committed to burning the remaining UST from its community pool in order to reduce the amount debt from the Terra ecosystem.
Like its predecessor, Terra 2.0 is secured using a proof-of-stake (PoS) consensus mechanism based on Tendermint, in which LUNA holders use their tokens as collateral to validate transactions. And, like most other PoS-secured blockchains, these validators receive a portion of transaction fees as rewards in proportion to the number of tokens they have staked. Moving forward, Terra will be incentivizing network security by annually inflating staking rewards by 7% to encourage validators to contribute to the long-term success of the Terra blockchain.
Drawbacks and Risks
Terra Classic and LUNC had originally received a fair bit of criticism as algorithmic stablecoins are susceptible to price volatility and are considered unreliable during crisis periods. These critiques were founded with the cataclysmic crash that forced the Terra 2.0 hardfork. Despite the fork being a necessity in order to save the Terra blockchain, it is noteworthy to point out that LUNA 2.0 is still an algorithmic stablecoin and there is no guarantee a similar situation may not happen again.
Furthermore, there are many who doubt that the decision to separate the original chain would be the end-all-be-all solution to solving the crisis, among them Ethereum founder Vitalik Buterin and Binance CEO Changpeng Zhao. Investors should go into LUNA 2.0 with extra caution as the coin is still in its infancy, and there is understandably a large amount of uncertainty with the perceived value of the coin due to recent events. At its foundation, the Terra 2.0 blockchain still offers one of the most effective stablecoin platforms in the industry, but it is more important than ever to fully understand the value of its technology before investing.
Terra 2.0 on CoinMarketCap
Terra 2.0 on Currency.com
Terra 2.0 on Capital.com
Terra Classic on CoinMarketCap’s Alexandria
Terra Classic on Binance Academy
Terra Classic on Gemini
Prior to listing Luna 2.0 on the VirgoCX Platform, VirgoCX performed due diligence on Luna 2.0 and determined that Luna 2.0 is unlikely to be a security or derivative under Canadian securities legislation. VirgoCX’s analysis including reviewing publicly available information on the following:
- The creation, governance, and location of Luna 2.0 and/or its primary development team;
- The supply, demand, maturity and liquidity of Luna 2.0; and
- Legal and regulatory risks associated with Luna 2.0.
Statutory Rights under Securities Legislation
VirgoCX is offering Crypto Contracts on crypto assets in reliance on a prospectus exemption contained in the exemptive relief decision Re VirgoCX Inc. dated May 30, 2022 (the Decision). Please be aware that the statutory rights in section 130.1 of the Securities Act (Ontario), and, if applicable, similar statutory rights under the securities legislation of each other province and territory in Canada, do not apply in respect of the Crypto Fact Sheet to the extent a Crypto Contract is distributed under the prospectus relief in the Decision.