Most recent update: [June 6th , 2022]
No securities regulatory authority has expressed an opinion about the Crypto Contracts or LUNC, made available on the VirgoCX Platform, including an opinion that LUNC is not itself a security and/or derivative.
What is Terra Luna Classic (LUNC)?
If you are in the market for stablecoins, then Terra and its derivative coin Luna Classic (LUNC) have no doubt made their way onto your radar. While there are a variety of fiat- and commodity-backed coins, Terra is developing a unique approach to stablecoins and the tools developers can use to create their very own pegged tokens. Built using Cosmos SDK, it goes against other backed tokens where, instead of using fiat or over-collateralized crypto in reserve, each pegged Terra coin is convertible into LUNC.
At its core, Terra seeks to provide programmable currency that is easy to spend, coupled with low fees, instant settlements, and the utility for cross-border transactions. Its versatility is such that many consider Terra to be more closely related to a mainstream fintech platform rather than a stablecoin platform, despite its technology being built on the blockchain and cryptocurrency. Terra aims to address many problems within the crypto community, like reducing centralization and removing technical limitations on assets through its open financial infrastructure.
So far, the protocol has issued stablecoins pegged to the US dollar, the euro, the Chinese yuan, the Japanese yen, the British pound, the South Korean won, and the International Monetary Fund’s special drawing rights – an international reserve asset supplementing the currency reserves of the multilateral lender’s member nation. These currencies are all collateralized by the LUNA token.
Terra was founded in 2018 by Daniel Shin and Do Kown, who also founded Terraform Labs, the South Korean company behind the Terra ecosystem. The two conceived the project to drive rapid adoption of blockchain technology and cryptocurrency with the focus on stability and usability. Kwon was the one who took on the position of CEO of Terraform Labs.
Prior to developing Terra, Shin had co-founded Ticketmonster – a major South Korean e-commerce platform – and Fast Track Asia – a startup incubator. Kwon had previously founded and served as CEO of Anyfi – a startup providing wireless mesh networking solutions – and had also worked as a software engineer for Microsoft and Apple.
The project was launched after Terraform Labs had procured US$32 million in funding, with lead investors including Binance Labs, OKEx, Huobi Capital, and Dunamu & Partners, the investment arm of Seoul-based crypto exchange Upbit.
In an example from Forkast, you can see how the average transaction on the Terra network would operate:
Say you want to buy a movie ticket, one of the products most often purchased using CHAI (one of Terra’s most popular decentralized apps, or dApps). First, you’ll have to mint your own Terra stablecoin on the website, burning the requisite number of LUNC tokens in the process. Once you have your stablecoins, you can use CHAI’s mobile app to pay for your tickets online or in-store. Once you buy a ticket with your stablecoins, Terra’s blockchain generates a small transaction fee that is distributed between LUNA delegators — token holders who choose to delegate their LUNA coin to a staking pool, in order to secure the network.
While Terra’s stablecoins ensure the stability of fiat currencies, the LUNC token is used as a utility and governance coin to power the collateralizing mechanisms that, in turn, back and secure the stability of the network’s stablecoins. LUNC coins have an elastic supply that changes depending on the needs of Terra’s collateralization mechanism. Furthermore, LUNC is utilized for the network’s validator staking using the aforementioned proof-of-stake (PoS) consensus mechanism.
Collateralized stablecoins typically allow holders to exchange their specified stablecoin for an equivalent amount of fiat or crypto; Terra is instead backed by LUNC and can be used as a counter party to swap for a specified stablecoin on the network (or vice versa) which affects both tokens’ supplies. Rather than having fiat (or another commodity) as collateral, LUNA is utilized as collateral.
Users that want to mint Terra stablecoins (like UST) need to burn the dollar-equivalent amount of LUNC. A small portion of LUNC tokens used in this minting process are sent to the treasury as a fee, allowing the network to profit. This process, known as seigniorage, is seen with central banks when they profit from printing money.
As the network utilizes algorithms to keep its stablecoins price-stable, Terra coins are known as ‘algorithmic stablecoins.’ In the community, they have attracted a fair bit of controversy as algorithmic stablecoins are susceptible to price volatility and are considered unreliable in times of crisis.
Technological characteristics and security
Built using Cosmos blockchain technology, Terra is designed to work on multiple chains. Now, it is live on both Ethereum and Solana, with plans announced to expand the protocol onto other top blockchain platforms in the future.
With the ideology of developers in mind, it is highly modifiable and allows programmers to build dApps in Rust, Go, or AssemblyScript using a development framework called CosmWasm. To add to the versatility, developers can add extra functionality to their dApps through the use of the network’s ‘oracles,’ which are off-chain sensors with the ability to communicate data to-and-from the blockchain.
Two of the decentralized finance protocols based on Terra are the Anchor and Mirror protocols. Anchor provides the functionality for incentivized staking and yield services, whilst Mirror enables fungible asset creation and usage. Terra Bridge, another feature of the platform, allows users to send Terra assets back and forth between Ethereum and the Binance Smart Chain.
LUNC, Terra’s functional token, has a dynamic supply of 1 billion coins. The network is programmed so that should the supply ever exceed that amount, it will automatically burn tokens to keep the equilibrium.
The Terra network is secured using a delegated PoS mechanism based on Tendermint, in which LUNC holders stake their tokens as collateral to validate transactions, receiving rewards in proportion to the amount of LUNC staked. Holders can also delegate others to validate on their behalf, allowing users to split rewards. To prove the security of the network, CertiK (a blockchain verification and penetration testing firm) completed a full security audit in May of 2019, a month after the Terra mainnet went live.
To participate in governance, users can utilize Terra Station, the official Terra wallet and dashboard that allows LUNC holders to access their funds and to stake and participate in network decisions.
One of the primary criticisms of Terra among blockchain enthusiasts is that it is significantly less decentralized than other networks. To put it into perspective, Terra has 130 validators while Ethereum has a whopping 3,038 validators that are securing the network. To further these concerns, the top network validators hold around 40% of the delegated LUNC supply.
To add to these concerns, Terra was issued a subpoena by the SEC towards the end of 2021 in regard to the Mirror protocol as part of an investigation into potential violations of securities laws.
Terra is one of the most promising blockchain projects in the industry today, offering low-cost payments and transactions for online vendors and their customers. Its open infrastructure is the perfect environment for creating dApps with huge potential for a thriving ecosystem within its protocol.
At the moment, eyes are focused the network’s Columbus-5 mainnet upgrade, which plans to introduce the burning of seigniorage fees, integrate a mutual insurance protocol called Ozone, and integrate the Wormhole Token Bridge, which should enable expeditious asset transfers between Terra, Solana, and Ethereum.
In May of 2022, Terraform Labs head Do Kwon had made the decision to greenlight a hard fork separating the original Terra Luna (now known Luna Classic) blockchain into a new and improved version called LUNA 2.0, in order to mitigate a catastrophic crash that had plummeted the price of not just the original LUNA coin, but the dollar-pegged UST as well. This rescue effort was decided through a vote in which validators approved the plan for a new chain, allowing the LUNA ecosystem to continue without the debilitating aftereffects of the original UST (now known as TerraClassicUSD). Alongside the new chain, most dApps built on the Terra blockchain will migrate over with most of the same features.
To learn more about the Terra network and its token LUNA, check out these resources here:
Terra on Binance Academy: https://academy.binance.com/en/articles/what-is-terra-luna
Terra on CoinMarketCap: https://coinmarketcap.com/currencies/terra-luna/
Terra on Forkast: https://forkast.news/what-is-terra-luna-stablecoin/
Terra on Gemini’s cryptopedia: https://www.gemini.com/cryptopedia/terra-luna-coin-fiat-stablecoin
Terra on Securities.io: https://www.securities.io/investing-in-terra-luna-everything-you-need-to-know/
Prior to listing LUNC on the VirgoCX Platform, VirgoCX performed due diligence on LUNC and determined that LUNC 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 LUNC and/or its primary development team;
- The supply, demand, maturity and liquidity of LUNC; and
- Legal and regulatory risks associated with LUNC.
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.