While Terra is down, it’s certainly not out—whether Luna Classic can recover will depend on the success of the burn program, support from the community, and the pace of protocol development.LUNA reached its all-time high on April 6, 2022, at a price of just under $120. Just about a month later, the token’s price dropped to well below $1 after the rapid collapse of the Terra ecosystem.
The legacy chain is still going on under the name Terra Classic, and the name of its token has been changed to LUNC. Terra Classic is surprisingly popular and has one of the most active communities in the crypto world. With the community-led effort, will Luna Classic reach $1 once again?
In this article, we’ll examine the reasons behind Terra’s collapse, examine Luna Classic’s $1 potential, and use technical data to determine whether Luna Classic will recover.
Key takeaways:
- Terra Classic (LUNC) was a $60 billion ecosystem before theissues with UST stablecoin's peg to the US dollar in May 2022caused hyperinflation of LUNA.
- Terra relied on an algorithmic design involving its native token, LUNA, with an arbitrage mechanism for stablecoin conversion. After the arbitrage mechanism failed and people began selling their USTC stablecoin en masse, the priceof LUNC plummeted by over 99.99%.
- After the collapse, the Terra project split into Terra 2.0 and Terra Classic.Luna Classic retainedalgorithmic stablecoins with a community-led effort.
- Reaching $1 for LUNC is very unlikely with the current supply, requiring a market cap of $5.80trillion.
- Terra Classic implements a 0.5% tax on LUNC transactions to reduce supply and reduce the hyperinflated supply of LUNC.
- A short to medium-term recovery to $1 seems improbable, with theCoinCodex prediction suggesting an increase to $0.000130 by June 2024.
Why did Luna crash?
Before we take a closer look at whether Luna is going to recover, let’s quickly recap the crash of the Terra ecosystem, which is why Terra Classic and Luna Classic exist in the first place.
The Terra blockchain platform was launched in April 2019. The chief developers of the platform were Terraform Labs, a company founded by Do Kwon (who fled South Korea after the Terra ecosystem collapse, along with access to $135 million worth of BTC owned by Terraform Labs). The platform revolved around algorithmic stablecoins pegged to various fiat currencies. For example, the UST stablecoin was pegged to the US dollar, the KRT stablecoin was pegged to the Korean won, and so forth. Terra’s stablecoins did not follow the classic reserve-based model, in which an equivalent amount of fiat currency or similar assets (such as treasuries) is held to back every token in circulation.
Instead, Terra relied on an algorithmic design that involved the platform’s native token, LUNA. The platform had a built-in arbitrage mechanism that could be used to burn stablecoins to mint LUNA or vice versa. For example, if you held 10 UST, you could burn 10 UST to mint and receive $10 worth of LUNA. Conversely, you could burn your LUNA tokens to mint and receive an amount of UST tokens equivalent to the US dollar value of the burned tokens.
The system worked well for a while, and the Terra platform started seeing explosive growth in 2021, primarily thanks to Anchor, a DeFi protocol that offered high yields on Terra stablecoin deposits. At one point, users were earning an APY of about 20% on their UST deposits.
The yields available in the Terra ecosystem drove huge demand. At its peak, LUNA had a market cap of $41 billion, and UST had a market cap of just under $18.7 billion.
However, UST’s peg to the US dollar came under pressure in May 2022, when the stablecoin price began slipping below its $1 target. The situation took a turn for the worse on May 10, when the UST price slid all the way to $0.77, suggesting that there were serious problems with its design. Even though the Luna Foundation Guard deployed their reserves of BTC and other assets to provide additional backing to UST’s peg, it wasn’t enough to stop UST’s downward spiral.
The algorithmic mechanism meant to keep UST at $1 went into overdrive. Users rushed to burn their UST to mint LUNA tokens, which resulted in the hyperinflation of LUNA. By the end of May, UST was trading at less than $0.03, and a single LUNA token was practically worthless.
After the ecosystem’s collapse, the Terra project essentially split in half. One part of the community abandoned the concept of algorithmic stablecoins and launched the Terra 2.0 project. The other part of the community decided to stay on the original platform, keeping the algorithmic stablecoins. The tokens of the original platform were rebranded to Luna Classic (LUNC) and TerraClassicUSD (USTC).
3/ It will effectively create a new Terra chain without the algorithmic stablecoin. The old chain will be called Terra Classic (token: $LUNC), and the new chain will be called Terra (token: $LUNA). The chain upgrade will commence a few hours after the Launch snapshot.
— Terra ? Powered by LUNA ? (@terra_money) May 25, 2022
Will Luna recover to $1?
Given the current supply, a $1 price for LUNC would mean that the Luna Classic market would be $5.8 trillion. Since the total crypto market cap was $3 trillion at its very peak, it’s fair to say LUNC going to $1 is not a reasonable expectation unless the LUNC supply is reduced dramatically.
| Terra Classic (LUNC) price | Implied Terra Classic (LUNC) market cap |
|---|---|
| $0.000119 (current price) | $687 million |
| $0.00100000 | $5.80 billion |
| $0.01000000 | $58 billion |
| $0.10000000 | $580 billion |
| $1 | $5.80 trillion |
The Terra Classic community is banking on the token’s new burn tax to reduce the supply of LUNC, which became hyperinflated when the UST stablecoin was drifting further below its $1 peg, leading the system to mint LUNC (which was called LUNA at the time) as holders used the system’s built-in mechanism to convert their UST positions to LUNC. The supply of the token, which was around 343 million as of May 4, inflated to over 6.5 trillion by May 14.
Can the Luna tax help Terra Classic recover?
Currently, the Terra Classic blockchain has a 0.5% tax on all LUNC token transactions. This is meant to gradually reduce the LUNC token supply. This tax was previously set at 1.2%, but it discouraged on-chain activity too much as the on-chain transaction volume dropped by over 90%. As a result, the community approved a proposal to slash the tax down to 0.2% last year.
Since the 0.2% tax was not enough to substantially reduce the hyperinflated supply of the Luna Classic coin, another proposalto change the tax rate was issued in March 2023 by "dfunk", an active Luna community member. He explained his decision for the 0.5% tax proposal was inspired by the teaching of James Tobin, a prominent American economist who served on the Fed's Board of Governors:
"As we focus on increasing LUNC demand via staking, we also need to focus on reducing LUNC supply via burn tax. As a result, I propose to increase the burn tax to 0.5%.
Why 0.5%? Burn Tax is a form of Currency Transaction Taxes 43, such as Tobin Tax. While financial transaction tax rates of the magnitude of 0.1%-1% have been proposed by normative economists, James Tobin himself had suggested a rate of 0.5% in an interview."
The proposal to bring the tax rate to 0.5% eventually passed in May 2023, with Binance, KuCoin, and other major exchangesexpressing their support for the new economic policy for the Terra Classic ecosystem. So far, the tax hike has succeeded in reducing the LUNC supply, but not enough to answer whether LUNC will ever recover with any confidence.
Even though the tax is much lower now than it was initially, having a 0.5% tax on all on-chain transactions could be a significant headwind for the actual adoption of the Terra Classic blockchain. Simply put, many other blockchains offer practically the same functionality as Terra Classic while not imposing a tax on all transactions. Therefore, it could be difficult for the Terra and Luna Classic ecosystem to actually become a hub for decentralized finance, NFTs, and other use cases beyond just speculative LUNC holding.
From one perspective, LUNC has already recovered. The coin has a market capitalization of over $687 million despite the chain’s DeFi ecosystem having a TVL of only about $3.85million as of February 21, 2024. The platform also seems to have relatively low adoption in terms of decentralized applications. So, it’s hard to argue that LUNC is undervalued at the moment.
Luna Classic Price Prediction for 2024-2025: Will Luna Classic reach $1?
Luna Classic recovering to $1 seems to be completely out of the question in the short to medium term, at least according to our prediction algorithm. At the time of writing, the LUNC price prediction on CoinCodex suggests that the Luna Classic price will only reach as high as $0.000141 by June 2024, which would be a +18.4% increase.
It’s currently difficult to imagine a scenario in which LUNC would significantly outperform the rest of the cryptocurrency market. The active community could be the ace up Luna Classic’s sleeve, as LUNC holders are very active in promoting the coin on social media platforms such as Twitter. However, the project will also have to make progress on a fundamental level if Luna Classic is going to recover to its former glory.
The bottom line: So, will Luna Classic Reach $1?
Luna’s all-time high market cap was about $41 billion, meaning that the price of LUNC would have to increase by almost 60x to match it. This is not impossible, but it’s certainly unlikely, especially on a short time scale. Still, LUNC is one of the best penny cryptos, even if it doesn’t ever manage to hit the psychological $1 level.
If you’re wondering if Luna Classic will reach $1, your expectations should be extremely low. With the current supply, it’s virtually impossible for that to happen, and it will take a very long time before the LUNC burn tax has a noticeable effect on the supply of LUNC. If you are interested in investing in LUNC but don’t know where to start, give our "How to invest in crypto" guide a read.
