What’s LUNA crypto? The blockchain ecosystem and its native token
Jun 24, 2025・5 min read
It’s no secret crypto is volatile, but few stories highlight that better than the rise and fall of Terra (LUNA). Once a centerpiece of decentralized finance (DeFi), LUNA and its companion stablecoin, TerraUSD (UST), saw a dramatic collapse in 2022 that wiped out billions and sent shockwaves through the crypto world.
The fallout didn’t just shake investor confidence. It contributed to a broader downturn in digital assets and sparked a global debate about how crypto, DeFi protocols, and stablecoins should be regulated.
Here, we’ll explain what LUNA crypto is, how it gained momentum within the Terra ecosystem, and what ultimately caused it to crash. We’ll also highlight what’s happened since – including the launch of LUNA 2.0 – and what the crypto community has learned from one of the most notorious failures in digital asset history.
What’s LUNA crypto?
The original LUNA token was the native asset of the Terra blockchain, launched in 2018 by Terraform Labs, a South Korean company founded by Do Kwon and Daniel Shin. Terra aimed to create a decentralized, stable payment system built around algorithmic stablecoins designed to rival traditional financial networks like Visa and Mastercard.
Unlike stablecoins like Tether (USDT) and USDC (USDC), which are backed by fiat currency reserves, TerraUSD – the most prominent LUNA stablecoin – maintained its peg to the U.S. dollar through an algorithmic relationship with LUNA. This mechanism allowed users to mint or burn tokens to keep UST near its target price.
The project gained significant traction in decentralized finance (DeFi) circles for its innovative approach to stablecoins and high staking yields. But the very design that helped it grow also introduced systemic vulnerabilities that would later prove catastrophic.
Understanding Terra and LUNA
Terra was a Layer 1, proof-of-stake (PoS) blockchain, meaning it relied on token holders to validate transactions and secure the network, rather than energy-intensive mining other networks use, including Bitcoin (BTC). It operated within a dual-token system designed to balance price stability and market volatility.
Central to the Terra ecosystem was a dual-token system designed to balance stability and volatility. The LUNA token served as the mechanism for maintaining the peg of Terra’s stablecoins by dynamically adjusting supply based on changes in UST demand.
If UST traded above $1, users could exchange $1 worth of LUNA for 1 UST, increasing the UST supply and lowering the price. If UST fell below $1, users could swap 1 UST for $1 worth of LUNA, reducing supply and nudging the price back up.
Anchor Protocol, a major DeFi application within Terra, fueled additional demand by offering depositors yields of up to 19.5% on UST. These high returns, subsidized by reserves, attracted billions in deposits, but they also created long-term sustainability issues that would eventually contribute to the system’s collapse.
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The rise and fall of LUNA
LUNA’s journey from obscurity to investors hailing it as the next big thing in crypto is one of the space’s most dramatic – and cautionary – stories. Launched in 2018, it saw modest early growth but entered its peak in 2021, fueled by the DeFi boom and the popularity of Anchor Protocol.
By December 2021, Terra had become the second-largest DeFi protocol, with over $20 billion in total value locked (TVL). The price of LUNA surged from under $1 in early 2021 to an all-time high of $119.51 in April 2022, earning Do Kwon a cult-like following. But while the system looked stable from the outside, it was built on a fragile foundation: the algorithmic peg of TerraUSD (UST).
UST’s stability relied on continued demand and the assumption that its arbitrage mechanism could withstand major sell-offs. What followed in May 2022 was a swift and spectacular breakdown that left a lasting mark on the broader crypto market.
Three key factors contributed to LUNA's demise:
- UST lost its peg, triggering a death spiral: On May 7, 2022, large withdrawals from Anchor Protocol raised concerns about UST’s sustainability. By May 9, UST fell below its $1 peg, reaching as low as $0.67.
- LUNA’s supply hyperinflated, erasing its value: As UST lost its peg, users burned it to mint LUNA, flooding the market with new tokens. LUNA’s supply ballooned from 1 billion to over 6 trillion in just three days, which caused its price to plummet from $80 to nearly zero.
- The crash wiped out billions and rippled across the entire crypto world: More than $40 billion vanished, devastating retail investors and contributing to a wider downturn in digital assets.
Much of the blame for Terra’s collapse fell on Do Kwon, who faced multiple lawsuits, criminal investigations, and an Interpol red notice. Authorities arrested him in Montenegro in 2023 for attempting to travel with falsified documents. Shortly after, in January 2024, Terraform Labs filed for bankruptcy.
What’s LUNA 2.0?
In response to the collapse of the original Terra blockchain, Terraform Labs and Do Kwon proposed a recovery plan that included a hard fork of the network.
On May 25, 2022, the Terra community approved Proposal 1623, which launched a new chain known as Terra 2.0 (or LUNA 2.0). This new Layer 1 blockchain excluded any algorithmic stablecoin and aimed to support decentralized applications (dApps) and rebuild a more sustainable ecosystem.
The original chain was rebranded as the Terra Classic network, and its native token was renamed LUNA Classic (LUNC). The former stablecoin, TerraUSD, was also renamed TerraUSD Classic (USTC).
Tokenomics of LUNA
Developers behind Terra 2.0 designed its tokenomics to support a more stable and sustainable blockchain ecosystem, aiming to avoid the pitfalls of the original algorithmic stablecoin model. The new network emphasized utility, long-term participation, and community-driven governance.
To promote fairness and restore user trust, Terra 2.0 distributed LUNA tokens through an airdrop to eligible holders of LUNA Classic (LUNC) and TerraUSD Classic (USTC). Of the 1 billion token supply, 35% went to LUNC holders, 30% to the community pool, and the remainder to USTC holders and post-debug participants.
Users who hold LUNA can stake their tokens with validators to help secure the network and earn staking rewards, with a target yield of 7%. Governance is also a key pillar: LUNA holders can vote on proposals related to upgrades, grants, and token burns, giving the community a direct role in the network’s direction.
LUNA’s future
What lies ahead for LUNA remains uncertain as the Terra 2.0 ecosystem works to rebuild trust and attract users. Still, the collapse of Terra Classic (LUNC) left the crypto world with lasting lessons.
First, it underscored the risks of algorithmic stablecoins and the need for more sustainable tokenomics. Though innovative, these systems depend heavily on arbitrage incentives and market sentiment, making them especially fragile during periods of volatility.
The fallout also intensified global calls for regulation. The scale and speed of the collapse pushed stablecoins and DeFi protocols into the spotlight, prompting lawmakers to demand tighter oversight.
Yet despite everything, some investors continue to speculate on LUNA Classic. Community-driven efforts like token burns and governance proposals have kept hopes of a comeback alive, even as the broader ecosystem shifts its focus to LUNA 2.0.
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Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.