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Luna recovery plan will face difficulties: Huobi report

After the unbundling of Luna and the collapse of the UST Stablecoin last week, Terra co-founder Do Kwon presented a proposal with his “way forward” vision – a plan to revive the Terra blockchain. The proposal calls for forking the Terra chain into a new chain without an algorithmic stablcoin, with the old chain being called Terra Classic (Luna Classic token – LUNC) and the new Terra chain (Luna token – LUNA).

In a recent report, “Can Terra be Saved and How?” published by Huobi Research, analysts examined the Terra relaunch project and concluded that there are significant obstacles to further development and recovery. The report also questions the new token distribution.

For example, it is unclear why 25% and 10% of the new token will be distributed during the proposed launch to UST and LUNA holders, respectively. Given that only those who have either held one of the tokens all along, bought UST recently, or bought LUNA after the end of the token hyperinflation would benefit. The plan’s envisioned one-year cliff cycle and vesting schedule also do not solve the problem of oversupply and sales, which probably will not reassure new investors.

Huobi Research Institute researcher Jet Lee, author of the report, said:

“While the Terra ecosystem has succeeded in attracting a number of teams and developers, we expect significant challenges to create a new chain given the looming debt obligations of UST holders and existing LUNA holders. Since Terra’s reserves are depleted and no new financing is anticipated, it is still unclear where the value will come from in a fork.”

In the report, the analyst suggests two alternative solutions. The first is to take the example of the 2016 Bitfinex hack, when a new fork was replaced by a token appreciation in the form of IOUs. However, unlike Bitfinex, which suffered from an established legal hack and loss of funds that could potentially be recovered, in Terra’s case most of the money lost in the collapse is due to loss of capital.

The second solution is to combine the new fork with fundraising, where new tokens would be issued to developers, LUNA holders (at the time of deprecation and at the end of the old chain), and angel investors. In this case, the new chain would be valued at $3-5 billion in fully diluted form, and its goal to raise $1-1.5 billion from angel investors would be motivated to generate profits from the network.

If LUNA follows the pattern of U.S. federal bankruptcy laws (i.e., Chapter 7 or Chapter 11), it would have to liquidate all assets for distribution to UST holders (resulting in a significant reduction in capital) or face close scrutiny of the amount of money that could be raised to save the Terra ecosystem with the new project.

“In the end, there are no easy solutions, given the collapse that has occurred,” the analyst commented. “The Terra ecosystem as a whole has a long road to recovery.”

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