What is LUNA and what does LUNA crypto do?

The Terra LUNA coin has fallen from a peak of more than $117 in April 2022 to barely one-hundredth of a cent, sending shockwaves right across the crypto market. After this crash, an entirely new blockchain was created with its own cryptocurrency. This have led many people to question how the new LUNA coin is different from the original.

What is LUNA and what does LUNA crypto do? This article will show you the answer.

What is Terra Luna?

LUNA is the native token of Terra, a blockchain developed by the Korean firm Terraform Labs. A total of $32m was raised to fund this development through the private sale of LUNA coins. Investments came from centralised sources including Binance, Huobi and OKEx.

LUNA launched in 2019 and for a time was one of the most successful decentralised finance coins. At one point CoinMarketCap ranked it the seventh-largest by market capitalisation. Since the recent crash, it has slumped to occupy the 214th spot as of 1 June 2022.

What does LUNA crypto do?

The aim of the Terra blockchain was to create stablecoins, tokens designed to combine the decentralised freedom of cryptocurrencies with the stability of fiat money. LUNA was a key piece to this system and was described as a staking or protocol token.

The blockchain had implemented a dual token system between the stablecoin TerraUSD (UST) and LUNA to achieve this aim. USTs were minted by burning LUNA and could also be swapped for LUNA.

The idea was that, if the UST value went above $1, the equivalent value of LUNA would be burned, which minted more UST, making it less valuable. Whereas, if the UST price dropped below $1, they were swapped for LUNA, which in turn made UST more valuable.

This relationship has been likened to that between the Moon and the Earth, as they rely on each other for stability. Burning LUNA coin was essential to this dynamic as it incentivised users by giving LUNA its value and, in theory, UST its stability.

Before the crash of May 2022, there was a limit of one billion LUNA coins in circulation and if this number was exceeded, LUNA was burned. As of 1 June, the original LUNA, now renamed LUNC, has a circulating supply of 6.5 trillion, according to CoinMarketCap.

A bullish 2021

After Terra’s launch of the Columbus-5 Mainnet upgrade on 30 September 2021, the LUNA coin price reached its first all-time high of $49.45 on 4 October.

This update has many new features for the Terra blockchain. For example, it has made moving assets like UST to other blockchains quicker and easier. Terra is able to do this as it is integrated with Cosmos, a network of multiple blockchains.

The update also has LUNA-specific upgrades. Before the Columbus-5 update, burned LUNA were sent to a community pool, where they were reinvested in new apps. Now, LUNA are permanently burned, making the coins scarcer and more valuable.

As LUNA’s value was reliant on Terra’s growth, updates to the blockchain saw the token’s price soar. The coin launched in July 2019 at $1.31. A year later it was still below $10. However, LUNA’s value saw a massive rise towards the end of 2021, and on 27 December, the coin was valued at $103.33, the highest value recorded for the year.

LUNA bucked the market-wide downturn of the early part of 2022, meeting a new all-time high of $119.18 on 5 April. However, there was then a substantial retreat in price, and on 6 May 2022, the token was trading at $82.94.

A Nasdaq article published in August 2021 emphasised that, unlike some other cryptocurrencies, Terra’s system is working and provides a new solution to avoid the volatility of token assets. Emma Newberry, the main contributor, wrote: “With an experienced leadership team, a clear whitepaper and several big backers, Terra has a lot going for it.”

LUNA’s collapse

In May 2022, however, the faults in Terra’s ecosystem were exposed, and LUNA saw a massive crash in its price.

This came against the backdrop of a bearish wider crypto market, with bitcoin hitting a 10-month low on 10 May 2022. The same day, LUNA saw its value plummet below $40. The cryptocurrency then plunged to its all-time low of $0.00001675 on 13 May.

Subsequently, Terra’s stablecoin, which is algorithmically supported by LUNA, lost its $1 peg. According to CoinMarketCap, the price fell to $0.29 on 11 May.

The chief executive of Terraform Labs, Do Kwon, tweeted a proposal to burn UST on 11 May. Despite the community passing the proposal, Terra was sidelined by another problem. The burning was not successful as it attempted to burn more UST than existed.

However, Kwon proposed another plan on 13 May that was passed by the community. This involved creating an entirely new blockchain to preseve the “strongest developer ecosystems in crypto”, which will leave behind its failed stablecoin.

The new blockchain is taking the same Terra name and its native cryptocurrency is going under the ticker LUNA again. However, the original project has been rebranded to Terra Classic, with the cryptos newly named LUNC and USTC.

Many Terra-based decentralised applications (DApps) have come out in support of this plan, including the staking-as-a-service provider BTC Secure and the Nebula Protocol, a decentralised passive asset management platform.

A portion of Terra’s community have also indicated a willingness to burn their LUNA tokens, in hope that the rarity will resurrect its price. While Do Kwon has tweeted that this is “not a good idea”, he has provided a burn address for users to send their cryptocurrency to.

Critics argue investors have already lost trust in the blockchain, and this could be the biggest crypto crash in recent history. In a recent letter, Mike Novogratz, chief executive of Galaxy Digital, said: “At a high level, it’s important to understand that volatility is likely to continue, and the macro situation is going to remain challenging. There is no cavalry coming to drive a V-shaped recovery.”

Intense scrutiny has been seen by investors over this new blockchain and cryptocurrency. The Binance exchange listed the new LUNA coin, but its chief executive Changpeng “CZ” Zhao told Fortune: "Having a failure of this size will make us extremely suspicious of any new projects that come out of this team or get on this blockchain."

Meanwhile, the original LUNC cryptocurrency has been left behind. At the time of writing, on 1 June, it was trading at $0.0001. USTC has also been abandoned by its developers, with it priced on 1 June at an all-time low of $0.01, down 80% in a recent seven-day peroid.

Even with the new rebrand, the implosion has sown seeds of doubt in the minds of investors, putting Terra's future at risk. The ecosystem has its work cut out in order to regain the trust it has lost with experts, exchanges and, most importantly, investors.

How many LUNA coins are there?

There are currently 6.531 trillion original LUNA tokens in circulation, according to CoinMarketCap.

What is LUNA coin used for?

For those wondering what Terra LUNA is, the coin is used as a protocol token to reduce the volatility of the stablecoins on the Terra blockchain. It is part of a dual token system with terraUSD; to mint more terraUSD, the equivalent value of LUNA must be burned.

This supposedly maintained the stable price of terraUSD and gave LUNA its value – until recently.