Collapse of Terra blockchain ecosystem forces talent migration

by · September 13, 2022

At the height of the 2022 bull market, the Terra ecosystem flourished with talent and innovation. The original token of the Terra blockchain had made it to the top-10 cryptocurrencies by total market capitalization. Protocols built the next iteration of a supercycle that seemed like it would never end.

Terraform Labs created Terra in the middle of the 2018 crypto market crash and built it all through the bear market. The Terra ecosystem’s main appeal and claim to fame came from their offering of the best returns in decentralized finance (DeFi), with up to 20% returns on the stablecoin through the Anchor protocol.

As of March 2022, Terra had built a total of 73 projects in the ecosystem. The ambition of the team was to participate in at least 87 more projects by the end of the year. Terra was becoming a serious competitor to BNB Chain, Solana, Cardano, Avalanche and other tier-1 blockchain infrastructure in their quest to gain market share from the current leader, Ethereum.

Being a blockchain built on the Cosmos network meant that Terra could scale and interoperate with other blockchains through the Interblockchain Communication Protocol (IBC). The hype from the bull market attracted liquidity and Terra profited from users’ appetite for new opportunities in the market.

Terra reached over 90% of the total value locked (TVL) of all Cosmos blockchains with assets worth more than $21 billion by May 2022.

That same month of May will be remembered as Terra’s collapse. The Terra token was supposed to maintain the peg of Terra’s algorithmic stablecoin – until it didn’t. Billions of dollars were wiped off the market in just a couple of days, and the thriving ecosystem Terra had built was left for dead.

Related: What happened? The Terra debacle exposes flaws plaguing the crypto industry

The community was quick to act. Although there was no attempt to revive the Terra token and its failed coupling mechanism to the stablecoin, a new network was created in an attempt to compensate those affected by the crash, not fully but more as a symbolic gesture of how resilient a community can be in Web3.

There are now three different trading tokens to consider in the market: Terra (LUNA) the new network’s token, Luna Classic (LUNC), which is how the token was renamed after the new network was created, and TerraUSD Classic (USTC). ) the failed algorithmic stablecoin formerly known as UST.

Currently, LUNC has a market cap of $2.8 billion, while LUNA has just over $303 million. The new Terra blockchain has a lower market cap than the failed USTC by $415 million.

Where did the talent go after Terra collapsed?

Suddenly and with no time to prepare, the projects that had chosen to build on Terra were faced with a tough decision that to date had never happened before, on this scale or severity.

Through Terra 2.0, an attempt was made to compensate projects by providing much-needed liquidity to those affected. The grants were distributed on June 17, with half of the tokens available on that date and the rest remaining locked for a period of three to six months with linear vesting.

For the projects that remained, the Terra 2.0 Emergency Builder Allocation program will unlock a new round of tokens for 35 projects. On September 17, Neptune finance will receive the largest amount of LUNA of almost $185,000 in value.

Linear vesting dates for Terra 2.0 Emergency Builder Allocation program. Source: Coinhall

The last group of 15 projects for this program will receive tokens on December 17th, Astroport will unlock the most with LUNA worth $1.25 million and Leap Wallet receiving the least amount of this group with LUNA worth $235,000 at the current market price.

As Terra was built from the Cosmos network, this was a natural migration choice for some of the protocols. The IBC architecture enabled projects to stay within this ecosystem and easily move to a new blockchain.

Not all projects found the idea of ​​remaining in Cosmos appealing as other blockchains began using developer grants to lure talent and new projects to their network.

With the Ethereum Merge just around the corner, Ethereum Virtual Machine (EVM)-compatible blockchains have outperformed the rest.

Polygon, an Ethereum sidechain, managed to include more than 48 projects from the Terra ecosystem through Polygon’s multi-million dollar Terra Developer Fund. An effective strategy to attract the talent that was unexpectedly available when Terra collapsed in May.

BNB Chain, the EVM-compatible blockchain created by Binance, is also committed to providing investment and support to projects considered to migrate from the Terra ecosystem from the BNB Chain Fund, which has $1 billion in investments and grants to distribute among those projects which is implemented within the BNB Chain ecosystem.

Other networks such as VeChain and Kadena tried unsuccessfully to take advantage of the talent migration.

Build a new chapter for projects that survived

Many great projects and talented people within the ecosystem pushed for progress and had good intentions in what they built on Terra. From the ashes of the debacle, these talented individuals will continue to build and create tools to improve the space as a whole.

There are six projects currently developing the new Terra ecosystem with just over $23 million TVL at the time of writing.

Terra 2 TVL Ratings. Source: DefiLlama

Chauncey St. John, founder of Angel Protocol, told Cointelegraph, “We lost a large portion of our treasury but live to fight another day and will be relaunched in the next couple of weeks,” adding:

“Angel Protocol has learned the importance of diversification and leaned into the fact that we can do more good as a multi-chain entity. As such, we are launching both IBC and EVM compatible hubs.”

Lido, the leading derivatives protocol for liquid staking, known for its market dominance of Ethereum liquid staking, also offered its services for those LUNA token holders who wanted to bet with them and remain liquid. After the collapse of Terra, the protocol decided to wind down operations around LUNA and initiate a shutdown process for this floating staking token. There is no known interest from Lido to support Terra 2.0 floating staking tokens at this time.