LUNA nosedived 100% down in the last 30 days. Let this sink in. Luna come down from an all-time high of $119 on April 5 to $0.000196 on the day of writing. What happened? How could a top 10 coin be so vulnerable?
There are many questions, grievances, proposals, and conspiracy theories as to what exactly happened. And what happened to the $3.5 million in reserves of Bitcoin, Avalanche, and more to preserve the Luna peg?? But the burning question is will Terra spring back? Will Luna & UST ever recover? Or is this the end? Let’s explain the LUNA and UST Crisis.
What Happened to UST?
How did we get here? This was the so-called ‘death spiral‘ that can kill algorithmic stablecoins. In simpler terms, LUNA and UST work together to preserve UST’s peg to the USD. The algorithm to maintain the peg burns LUNA to mint UST if the price is over $1 and it burns UST for LUNA if the price is below $1.
This in combination with arbitrageurs taking advantage of something they can buy for 98 cents and sell almost immediately for a dollar is the way they were maintaining the peg for UST. Then the ‘alleged’ attack happened.
The Alleged Attack
It’s still not yet proven that it was a deliberate attack but most think it was. First, how could it happen? Way back in November, crypto investor Freddie Raynolds described EXACTLY how this could happen in a George Soros-style attack.
A few weeks ago I responded to @tbr90’s tweet with a brief outline of how a wealthy attacker could not only break @terra_money but profit heavily doing it with a Soros style Black Wednesday attack. Below I provide a detailed breadown…~$1B capital needed.https://t.co/MIbSH3Lwpq
— FreddieRaynolds (@FreddieRaynolds) November 25, 2021
The meaning of this kind of attack is how Soros crushed the Bank of England by shorting the GBP. This great speculative analysis was made 6 months BEFORE this happened and what happened was very similar.
So that’s how it could happen to create a vicious cycle of continuous minting and selling (or shorting) to drag the price down so each time more LUNA is needed for the $1 of LUNA for $1 of UST.
So that’s how it could happen. But what DID happen? First, we have the Curve 4pool. The goal of the 4pool was to be the place to exchange your stablecoins. It has 4 stables in the pool. USDT, USDC, UST, and Frax. The goal, as Terra Labs founder Do Kwon said, was to kill DAI. DAI was the 3rd stablecoin in the famous Curve 3pool of stablecoins and Do want to displace DAI with UST. Kwon famously said ‘by my hands, DAI will die’.
Liquidity for UST was lower than usual because Terra was preparing to put UST into the 4pool. The day this all started was exactly 1 day before the opening of the Curve 4pool. Another reason why people think this was an attack and not just a scam from Terra or a major design flaw in UST. What happened next?
More About The Alleged Attack
We have a few sources who say our yet unnamed attacker (YUA) borrowed BTC from Gemini by shorting it. Knowing the LUNA Foundation Guard (LFG) is buying BTC as a reserve to protect their peg, our YUA offers LFG a direct OTC deal for $1 billion of UST.
So here we are and liquidity is low due to the shift from the 3pool to the 4pool for UST. Now BIG sell orders for UST start coming in on Binance. This includes a $10 million sell order. In the meantime, aggressive shorting of LUNA is happening too. Liquidity is nowhere for people that want to exchange UST for USDT, USDC, or DAI so the depegging starts.
Anchor, where most UST resides due to its famous 20% interest rate is seeing tons of withdrawals and burning UST which is creating even more LUNA. A full 52% of all deposits on Anchor have been withdrawn now and lots of loans liquidated.
As Ryan Selkis, founder of crypto data management firm Messari, says, this looks like an attack and (attempted) kill shot by a savvy bear.
Algo stables are risky by definition. Perfect storm to put LUNA in this position, and I don’t think it happens without the precise timing of the “attack” around the 4pool migration.
Ethics / legal aside, it certainly looks like a kill shot (or a maim shot) by a savvy giant bear.
— Ryan Selkis 📖 🖊🔑 (@twobitidiot) May 11, 2022
No one knows if this savvy bear investor is just an investor making money on shorts or if they had an agenda from a centralized stablecoin like USDT or USDC or someone trying to help DAI maintain its relevance.
And because we do not know either, we are not going to speculate on it even though some huge TradFi firms are already denying their involvement. Including ones that have a relationship with USDC.
What Happened to the Terra Reserves That Were Supposed to Protect the Ust Peg?
Since January, Luna Foundation Gaurd (LFG) had stockpiled over $3.5 billion in reserves of Bitcoin, Avalanche, LUNA, and UST, to deploy if UST ever slipped below $1. Per LFG, that loaned capital would be used to buy up huge amounts of UST, creating buy pressure that would push the stablecoin back up to its intended price. But, even days later no salvation has come for the stablecoin and it is still trading close to $0.084.
On May 16, that’s today, LFG confirmed that it has sold its 80,000 BTC to buy back UST. And it is now looking forward to using its remaining assets to compensate the remaining users of UST and would prioritize the smallest HODLers first. Even Ethereum founder Vitalik Buterin supports the smallholder’s first compensation move.
What’s Going On with Terra Now?
In a series of events, Terra’s LUNA token kept losing its price ground. Exchanges like Binance, and Crypto.com kept delisting Luna. However, the Luna trading has resumed on most of the exchanges now. Well, the first thing was that Terra’s validators agreed twice to stop the network.
The first time was on Thursday from midday to early afternoon NY time. This was so validators could add a security patch to their systems because a governance-based attack would cost A LOT less to try now. And that would kill off the project. After about 30 minutes, the chain restarted and started to produce blocks again.
Then, the 2nd more concerning stoppage. It started around 11 pm NY time. This tweet from Terra said they are working on a plan to reconstitute the network.
Finally, After 10 hours, they restarted the production of new blocks. When they restarted, they disabled on-chain swaps and bridging off-chain assets like bETH used for collateral on Anchor. However, the popular Wormhole bridge is now working. Former developer relations for Terra Will Chen, who goes by @Stablechen on Twitter, gave us some insight into what the community and developers are discussing. His observations include:
- Restoring the chain to a moment before the attack
- Full collateralizing UST (we mentioned a partial plan to collateralize it in our most recent stablecoin video)
- New pegging, minting, and burning mechanisms for LUNA
The community is deciding on a new @terra_money, between restoring a snapshot prior to attack, removing TFL, fully collateralizing UST and drafting & deliberating new mechanisms for $LUNA.
We must salvage the remaining value in the ecosystem & community and rebuild the right way
— will chen 🌑 (@stablechen) May 13, 2022
And other very serious changes to try to save UST, LUNA, and the ecosystem of apps built-in Terra.
More About Terra
Remember because of the minting and burning relationship between UST and LUNA, burning UST to get rid of lots of the bad debt in the system now has meant that the circulating supply of LUNA has skyrocketed.
Go back a little more than a week ago and you can see that supply was declining every day due to burning it to create more UST. Circulating supply for LUNA on May 3rd: 343 million. And now, the circulating supply is 6.5 trillion after 5 days in a row of growing circulating supply.
This helps explain how the death spiral affected LUNA. We have:
- Price declining
- Supply skyrocketing
- Price declines further due to this huge extra supply
- And the price and supply keep building on themselves as a vicious circle.
This is how a top 15 coin can go from $100 each to a fraction of a cent in a week. Current prices of the 3 biggest projects on Terra are:
- UST at 10 cents instead of $1 where it is supposed to be.
- LUNA $0.000018 or 1.8 millionth of a cent.
- Anchor (ANC) at 13 cents.
Now to be fair, Terra is going through an existential crisis and right now they are just trying to save the 2 assets and the ecosystem so all effort is on that. But there is something that may help the community and Terra ecosystem move forward.
The Newest Revival Proposal from Do Kwon
And that something started on Friday midday NY time when a new plan came to light. Do Kwon posted on the Terra Governance and Research Forum. The proposal to save the ecosystem is a hard fork and recapitalizing with 1 billion LUNA tokens. The tokens will go to the following groups:
- 400 million (40%) to LUNA holders before the depeg event. This includes everyone that held bLUNA, LUNAx, pLUNA, and other derivations. All but replenishing the Terra Labs account. All other account holders.
- 400 million (40%) to UST holders on a pro-rate basis at the time of the new network upgrade. Presumably, that means as of right now.
- 100 million (10%) to LUNA holders at the time Terra stopped the chain yesterday. The idea here is that some last-minute buyers helped to provide exit liquidity for UST holders and some of that bad debt should be rewarded for their contribution.
- 100 million (10%) for the community pool for future development.
Also, LUNA would be distributed and automatically staked due to the fragile state of the network and lower costs involved in trying a 51% attack. You would be able to unstake at any time with your LUNA but the proposal does not say if you have to wait 21 days like in the previous unbonding policy or pay a higher swap fee to swap it now.
That’s Do Kwon’s proposal. But here’s another decent proposal option up for discussion in the Forum.
Revival Plan 3.0 & Collateralization Plan
This plan by member Trogdor has some backing too. Let’s see what he is proposing:
- Burn all TFL (Terra Labs) tokens and community tokens. This is equal to 11% of the supply of UST and would help prop up the price. He recommends burning TFL’s LUNA tokens too.
But, according to @ashwsbreal, LFG needs to burn at least 80% of the supply for Luna to hit $1 and that would mean burning a part of your Luna holding also. New Purchase Plan that Includes Making Whole, Burning, and Collateralizing. Here is the proposal to accept investment into another stablecoin like USDC.
7/ Overall, approximately 1,388,233,195 will be eliminated from the UST supply upon executing the three proposed items above. This equates to roughly 11% of the outstanding supply.
— Terra 🌍 Powered by LUNA 🌕 (@terra_money) May 12, 2022
Then buy 1 UST in the open market for each $1 USDC invested and give it to an investor to help them recover their funds. Then use the remaining tokens after investors are covered in the following 4 ways in equal 25% usage:
- Buy LUNA to give to investors
- Buy LUNA and Burn it
- Keep as USDC for collateral
- Buy LUNA to keep as collateral
More community involvement and a request to replace the executive team. And where there would be more details to work out, there are aspects of this recapitalization program that make a lot of sense including collateralizing the new tokens at first and keeping some as collateral to help manage the price.
Realistically, we think Kwon’s plan is more likely to pass than this one as Kwon is in a position to implement his plan and this plan proponent Trogdor is not. But, the community is looking at and considering lots of ideas. There are a couple of others on the table but we think this collateralization plan from Trogdor has the best chance of the alternate options.
Needless to say, everyone with a stake in LUNA, UST, or LUNA derivatives like LUNAx, or aUST from Anchor will have a lot to think about and a few things to vote on in the coming days about the future direction of the Terra blockchain and its ecosystem.
So there you have it. No rumors, with no speculation. No mention of Blackrock or Citadel or other potential investors or bad actors. Just the facts of exactly what happened and why.
The ‘death spiral’ that has broken algorithmic coin projects before UST that many feared could or would happen here did. And if it was an attack, and we think it was, the attacker picked the perfect lowest liquidity time before the new Curve 4pool to put it into action.
Even 48 hours later after the start of the 4pool, this would have been much more difficult and costly to do because there would be lots of UST liquidity available on Curve that was NOT available when this happened.
We explained Terra’s initial reactions, their 2 halts of their chain and restarts, and 2 plans they are considering to move forward. Never has a coin this big had this happen. Never a stablecoin with this much acceptance has had this happen. And never a coin with an ecosystem built out and as big as Terra’s has this kind of implosion of one coin or project ever happened.
That’s why the repercussions of this both for Terra and the industry are still unknown and could remain in effect for some time. But it’s not all doom and gloom. Crypto has survived terrible things before. Many forget ETH’s DAO hack that almost killed it 6 years ago and look where it is now.
The one positive is that if you have some money set aside, the very best projects have lost a ton of value with ZERO fundamental changes in the last week. It’s your chance to buy the best of the best at a discount. That’s what we are looking to do.
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