HCS Score
Red Line Violations
These are absolute prohibitions in Islamic finance. If any red line is triggered, the asset is automatically classified as HARAM.
Riba Exposure
Not an interest-based lending or borrowing protocol
Gambling / Betting
No gambling or betting mechanism
Haram Industry
Not involved in haram industry
Based on Red Line Screening and HCS Scoring.
Haram / Non Compliant
This cryptocurrency is evaluated as Haram for investment and use because the asset demonstrates material Sharia compliance concerns within the CoinStudy HCS framework.
Explanation
This asset shows significant concerns related to Sharia compliance, financial structure, or speculative design.
Reviewed by
CoinStudy Shariah Board
May 2022 will remain one of the darkest months in cryptocurrency history.
TerraUSD — UST — was one of the largest stablecoins in the world. The Terra ecosystem it lived on was worth tens of billions of dollars. Anchor Protocol was offering 20% APY to depositors and attracting enormous capital flows. Billions of ordinary investors — including many from Muslim-majority countries — had deposited their savings based on the promise of stable returns.
Then it collapsed. Over the course of a few days, UST lost its dollar peg and entered a death spiral. LUNA — the token designed to absorb the instability — hyperinflated to near zero. Tens of billions of dollars in value was destroyed. Ordinary investors around the world lost their life savings.
For Muslim investors, the Terra collapse is not just a financial cautionary tale. It's a case study in what happens when financial products built on prohibited foundations fail catastrophically.
We ran LUNC through the full CoinStudy Halal Crypto Standard (HCS) methodology. Here's the complete picture.
LUNC fails the CoinStudy HCS Sharia red-line screening. Three red lines are triggered — Riba Exposure, Guaranteed Interest, and Synthetic Interest Products — resulting in an automatic Haram classification with no further scoring.
The collapse of 2022 didn't create these compliance problems. They were built into the ecosystem's fundamental design from the beginning.
Terra Classic (LUNC) is the original Terra blockchain that powered TerraUSD — an algorithmic stablecoin designed to maintain a one-dollar value through a mint-and-burn mechanism linking LUNA and UST.
Following the catastrophic collapse of the UST peg in May 2022, the original Terra chain was renamed Terra Classic. A separate new Terra chain was launched. The original token became LUNC — continuing under community governance with token burning initiatives and ecosystem revival efforts.
Understanding what Terra Classic was is essential to understanding why it receives a haram classification. The assessment is based on the ecosystem's foundational economic architecture — not just its current post-collapse state.
Unlike asset-backed stablecoins that hold reserves of cash or commodities — like the stablecoins we've analyzed throughout this series — TerraUSD maintained its dollar peg through algorithmic mechanisms.
The system used a mint-and-burn relationship between LUNA and UST. When UST traded above one dollar, arbitrageurs could burn LUNA to create new UST, profiting from the price difference and increasing UST supply to push the price back down. When UST traded below one dollar, arbitrageurs could burn UST to create LUNA, reducing UST supply to push the price back up.
This mechanism worked during periods of growing demand. It was catastrophically fragile during periods of contracting demand — as the May 2022 collapse demonstrated with devastating results.
Understanding Terra Classic's compliance failure requires understanding Anchor Protocol specifically — because Anchor was the primary driver of Terra's growth and the clearest manifestation of its compliance problems.
Anchor Protocol offered depositors approximately 20% APY on UST deposits. This yield attracted enormous capital flows — by early 2022, a significant majority of all UST in existence was deposited in Anchor earning this yield.
Let's be direct about what 20% APY on deposited stablecoins is. It's an extremely high guaranteed return on deposited capital. It's interest. There was no genuine productive economic activity generating this yield — it was subsidized by the Terra ecosystem itself, creating an artificial yield that was fundamentally unsustainable.
This yield-driven growth model — attracting deposits with guaranteed high returns, creating circular demand for UST, and depending on continuous growth to maintain the system — is the core compliance failure. The entire Terra ecosystem's growth was built on a product that functioned as an interest-bearing deposit facility paying exceptional guaranteed returns.
Anchor Protocol — the primary use case and growth driver for the Terra ecosystem — offered guaranteed percentage returns on deposited UST. Users deposited capital. They received ongoing guaranteed percentage returns. The return was explicitly advertised as a specific APY.
That is interest-bearing deposit income — Riba — regardless of how it was technically generated. The fact that the yield was funded by ecosystem subsidies rather than productive economic activity made it more concerning, not less. The guarantee was artificial and unsustainable.
Additionally, the algorithmic stablecoin mechanism itself created interest-like financial relationships through the arbitrage incentives embedded in the mint-and-burn system — creating structured financial returns from participating in the monetary engineering.
Under the CoinStudy methodology, these structures trigger the Riba Exposure red line clearly and decisively.
The May 2022 collapse is itself the most powerful demonstration of the Gharar concern in the Terra ecosystem.
The algorithmic stabilization mechanism depended on continuous market confidence and growing demand. When confidence broke — triggered by a large withdrawal of UST liquidity — the death spiral began. The arbitrage mechanism that was supposed to restore the peg instead accelerated the collapse as LUNA hyperinflated and UST depegged further.
The system's stability depended on complex market dynamics, continuous arbitrage participation, maintained confidence, and growing demand — all of which are inherently uncertain and cannot be contractually guaranteed. The vulnerability was fundamental to the algorithmic design, not an unforeseen external shock.
Islamic finance's emphasis on Gharar — avoiding contracts and financial arrangements with excessive fundamental uncertainty — is directly vindicated by what happened to Terra. The uncertainty was structural and catastrophic.
The Terra ecosystem actively incentivized speculative participation — through arbitrage opportunities in the mint-and-burn mechanism, through yield expectations from Anchor's high APY, and through LUNA price appreciation expectations.
Many participants engaged with the ecosystem based on expected financial returns rather than productive utility. The ecosystem's growth was driven by capital chasing yield rather than by users seeking the genuine utility of a stable payment system.
LUNC fails three red lines. Under the CoinStudy HCS framework a single failure results in automatic Haram classification. Three failures makes this result definitive.
Riba Exposure — ❌ Failed. Anchor Protocol's guaranteed high-yield products created direct Riba exposure as the ecosystem's primary growth driver. The algorithmic mint-and-burn mechanism created additional interest-like financial relationships.
Guaranteed Interest — ❌ Failed. Anchor Protocol's explicitly advertised ~20% APY on UST deposits constitutes guaranteed interest income on deposited capital — one of the most explicit guaranteed interest products we've encountered in our analysis series.
Synthetic Interest Products — ❌ Failed. The financial instruments created within the Terra ecosystem — UST yield products, algorithmic stablecoin positions — function as synthetic interest-bearing financial products.
Gambling and Betting — ✅ Passed.
Haram Industry — ✅ Passed.
Three red lines failed. Layer 2 scoring is skipped entirely.
Overall Result: Haram — Red Line Violations
After the collapse, the Terra Classic community has continued operating the blockchain with reduced functionality, token burning initiatives, and revival efforts. Some community members maintain hope for ecosystem restoration.
Under the CoinStudy methodology, the foundational economic architecture remains the primary basis for assessment. Terra Classic is the continuation of the original Terra blockchain — whose design was built around the algorithmic stablecoin and yield-generating products that create the compliance failures.
Current community activity — token burning, governance participation, revival efforts — doesn't transform the fundamental nature of what the ecosystem was designed to be. The compliance assessment is based on what the project is and was, not on post-collapse revival narratives.
The Terra collapse deserves reflection beyond the compliance classification — because it illustrates something important about the relationship between Islamic finance principles and financial system design.
Islamic finance's prohibition of Riba, Gharar, and Maysir isn't arbitrary restriction. These prohibitions reflect accumulated wisdom about the kinds of financial structures that create instability, harm, and exploitation.
Anchor Protocol's 20% APY on algorithmic stablecoin deposits was Riba — but it was also an economically unsustainable structure. The artificial yield attracted capital that the ecosystem couldn't genuinely support, creating a fragile dependence on continuous growth. When that growth slowed, the system collapsed catastrophically.
The Gharar prohibition exists because genuine uncertainty in financial contracts creates harm. Terra's algorithmic stability mechanism had fundamental uncertainty about its ability to maintain the peg under stress. That uncertainty materialized as catastrophic failure.
Muslim investors who recognized these concerns and avoided Terra on compliance grounds were protected from one of the most devastating collapses in crypto history. Islamic finance principles and sound financial risk management converged toward the same conclusion — not by coincidence, but because both reflect genuine economic truth.
Before investing in any algorithmic stablecoin ecosystem, ask yourself:
Does the stablecoin maintain its peg through algorithmic mechanisms rather than real asset reserves? Does the ecosystem offer high guaranteed APY yields on deposits — yields that lack clear sustainable economic foundation? Is the stability of the ecosystem dependent on continuous growth and maintained market confidence rather than genuine asset backing? Do you understand the death spiral risk inherent in algorithmic stablecoin designs under sustained selling pressure? Would a qualified Islamic scholar recognize the yield products in this ecosystem as resembling Riba?
For Terra Classic — these questions are not hypothetical. They were answered definitively by the events of May 2022.
Terra Classic (LUNC) is classified as Haram / Non-Compliant under the CoinStudy Halal Crypto Standard.
Three Sharia red lines are triggered — Riba Exposure, Guaranteed Interest, and Synthetic Interest Products — resulting in automatic Haram classification. The ecosystem was fundamentally built around algorithmic stablecoin infrastructure, synthetic monetary mechanisms, and high-yield deposit products through Anchor Protocol that created direct and serious Riba exposure.
The May 2022 collapse demonstrated with catastrophic clarity that the financial structures underlying the Terra ecosystem were both prohibited and economically unsustainable — twin failures that Islamic finance's foundational principles correctly identified before the collapse occurred.
For Muslim investors — Terra Classic represents one of the most important cautionary examples in our analysis series. The compliance concerns were real and structural. Their consequences were severe and real. Both the Islamic finance assessment and the market outcome pointed to the same truth about what was built.
Disclaimer: This analysis is provided for educational and research purposes only. This analysis is based on guidance from CoinStudy's HCS Shariah Board members. CoinStudy does not issue personal fatwas or financial advice. Please consult a qualified Islamic scholar for individual guidance.
Guaranteed Interest
No guaranteed interest obligations
Synthetic Interest Products
No synthetic interest instruments
3 Red Lines Failed
This asset is automatically classified as HARAM.
