How Did Terra’s Governance Model Assist Its Collapse?6 min read

With regard to blockchain-affiliated organizations, a DAO (Decentralized Autonomous Organization) governance model is crucial to ensure a decentralized community. The concept of DAOs enables blockchain users to implement the strategies they believe are best for the organization. Unlike what we are currently used to from the typical hierarchal corporations. So what exactly is a DAO? It’s a smart-contract organization that requires members’ votes to implement changes. As such, it eliminates the need for a central governing body.

Among the organizations that operate a decentralized governance model is the South Korean-based corporation Terraform Labs. It was founded by Do Kwon, a cryptocurrency developer currently being investigated by the U.S and South Korean governments for fraud and tax evasion charges. Even hacker activist group, Anonymous, vowed to bring his alleged crimes to light.

The Terra ecosystem is an open-source blockchain infrastructure once known for its two-token model, the Terra stablecoin, and its utility token LUNA, now known as LUNC. In May, the blockchain witnessed a significant collapse that resulted in the de-pegging event of its stablecoin, UST. The aftermath of Terra’s collapse certified the importance of a decentralized governance model in crypto. Hence, in this article, we go deeper into how Terra’s governance model had an essential role in its decision-making process.

How Does Terra’s Governance Model Work?

The Terra protocol is a Proof-of-Stake consensus mechanism governed by its community members. Before its collapse, it operated a two-token model blockchain. The Terra token is an algorithmic stablecoin not backed by an equivalent asset. Whereas LUNC is the token used for staking and governing purposes. It once had the role of managing Terra’s equilibrium to ensure its stability to the pegged currency. However, we all know how that turned out.

Terra’s governance model enables its community members to propose and implement changes to its ecosystem, using the three following steps:

1) Suggesting A Proposal

A proposal is an idea that stems from a Terra member, which they believe will benefit the organization. To submit a petition for a change to the governing body, the member will draft and introduce a proposal with an initial deposit of LUNC. According to Terra’s forum, these are the most common proposals:

  • ParameterChangeProposal: Changing parameters defined in each module.
  • CommunityPoolSpendProposal: Spending community pool funds.
  • TextProposal: Handling directional changes issues or any decision requiring manual implementation.

2) Voting Process

When a proposal is submitted to the community members, it enters a two-week voting period. Members yield their votes with their staked LUNC, where one LUNC equals one vote. The voting period ends once it reaches a deposit of 50 LUNC.

Each proposal comes with 4 voting options:

  • Yes: In favor of the proposal.
  • No: Not in favor of the proposal.
  • NoWithVeto: Not in favor of the proposal. The deposit should be burned.
  • Abstain: Voter abstains.

After the votes are calculated, the proposal will pass if it meets three conditions:

  • Quorum met: a minimum of 40% of all staked LUNC must vote.
  • NoWithVeto votes are less than 33.4% of the total vote.
  • The number of Yes votes reaches a 50% majority.

3) Deposits

The purpose of deposits assists in preventing unnecessary or spam proposals. Therefore, members can submit their vote as NoWithVeto if they consider a petition unnecessary. In addition, deposits will get refunded under the four following conditions:

  • The minimum deposit of 50 Luna is reached within the two-week deposit period.
  • Quorum is met: the number of total votes is more than 40% of all staked Luna.
  • NoWithVeto votes are less than 33.4% of the total vote.
  • Votes are a majority of Yes or No.

On the other hand, deposits will be burned under the three following conditions:

  • The minimum deposit of 50 Luna is not reached within the two weeks.
  • Quorum not met: the total number of votes after the voting period is less than 40% of all staked Luna.
  • NoWithVeto votes are above 33.4% of the total vote.

How Did Terra’s Governance Model Assist With The Collapse?

On May 11th, the Terra protocol witnessed a horrific collapse with its two tokens. It started when a suspicious amount of UST was dumped. So, it began losing its value to its pegged currency. Terra community members were then advised to burn their Terra tokens to mint LUNC. However, the increasing supply of LUNC crashed the cryptocurrency by 100% in only 48 hours. Terra community members and investors were heartbroken by the token’s collapse. Since many put their life savings into the altcoin, only for it to disappear in just 2 days. However, this is where a DAO governance model comes in handy.

On May 25th, Terra community members passed governance proposal 1623, which defined the start of a new Terra chain. According to Do Kwon, a Terra rebirth was a much-needed solution to reimbursing investors prior to UST’s catastrophe. Even though many believed that a mass burning of Luna Classic (LUNC) was the right way to go about it.

Terra's governance model
Do Kwon’s tweet

The proposal got the support of some names in the crypto world. DeFi protocol builder Strader Labs voiced their advocacy in a tweet, “What happened to Terra and Lunatics was unfortunate. However, we need to preserve the community and move forward. The new proposal is a step in the right direction.”

Terra's governance model
Strader Labs’ Tweet

On the other hand, some were taken aback by Do Kwon’s audacity to re-build Terra. One Twitter user showed their concern by responding to Strader Labs’ tweet, “Preserve the community? The whole plan is basically to ditch the community, start a NEW community and keep the name.”

Terra's governance model

Nevertheless, the proposal achieved the conditions necessary for it to be passed. As 65% of votes were in support of a new Terra genesis. Hence the start of LUNA 2.0.

What Is Terra 2.0? The LUNA Rebirth

On May 27th, Terra 2.0 officially replaced the old Terra blockchain, now called Terra Classic. Additionally, it ditched the concept of algorithmic stablecoins completely. Now, it solely focuses on the rebirth of its utility token, LUNA 2.0. According to the proposal’s plan, Terra 2.0 has a supply of 1 billion LUNA tokens, which will be airdropped accordingly:

  • Community Pool – 30%
  • Pre-depeg LUNC holders – 35%
  • Pre-depeg UST holders – 10%
  • Post-attack LUNC holders – 10%
  • Post-attack UST holders – 15%

The LUNA rebirth has yet to attract the same number of investors as with Luna Classic. Mostly because Terra was mainly advertised as the most secure algorithmic stablecoin in the market, and Luna merely absorbed its volatility. With that out of the way, it seems that Luna 2.0 is mission-less, and a mission-less cryptocurrency in today’s market goes nowhere.

Final Thoughts

In my opinion, DAO governance models must overtake the current governing system of organizations. Since there’s no better way for an organization to succeed than with the changes its stakeholders will bring. Nevertheless, with Terra specifically, people were quick to believe that its governing body was somehow manipulated by Do Kwon. Thus, defeating the purpose of its decentralized governance model.