The LUNA token was a month ago, celebrating a new ATH of $119.18. Today, at the time of writing, it’s worth $0.00000843 where all exchanges suspended trading in LUNA. Furthermore, the Terra blockchain has now halted. A serious fall from grace.
So, what did actually happen? How can the LUNA price go to almost 0? Crypto Twitter DeFi researcher Route 2 FI had a thread with a timeline and explanations. Let’s find out what was going on.
The Terra blockchain has officially halted at block 7607789.
Terra Validators have halted the network to come up with a plan to reconstitute it.
More updates to come.
— Terra 🌍 Powered by LUNA 🌕 (@terra_money) May 13, 2022
What Happened Beforehand?
People like Route 2 FI believe that this was a coordinated attack against UST and the Terra ecosystem. So, before this attack could play out, there are four factors that you need to consider:
- The people behind this attack borrowed a grand total of 100,000 BTC from the Gemini exchange. They short these BTC.
- The next step is that they make an OTC (over the counter) deal of $1 billion UST.
- The Luna Foundation Guard (LFG) already bought BTC during March and April. This is a defense mechanism that is there to protect the peg.
- Curve announces a switch from a 3-pool to a 4-pool. The 3-pool consists of DAI, USDC, and USDT. The 4-pool consist of UST and FRAX as decentralized stable coins. There are also USDC and USDT as centralized stablecoins in it.
What Started All This?
This all started with a huge sell-off on Curve. As a result, the 3-pool was slightly out of balance. The reason was a UST-to-USDC swap of $85 million. This starts to make the rounds on Twitter rather swiftly. This results in a $2 billion UST withdrawal on Anchor. In the meantime, the peg moves between 0.987-0.995. That first defensive step was successful, although the peg never completely recovered.
To prepare for the new 4-pool on Curve, the LFG removes $150 million UST from the 3-pool. At that very moment, the attackers use the OTC bought UST and drain the pool with $350 million. Curve is now out of liquidity. This results in the peg moving to 0.97-0.98.
Now panic starts to set in. Rumors on Twitter start spreading fast. This leads to big tanking on the Anchor protocol. Deposits drop to around $10 million per minute. The peg is still at 0.97 and everything seems to be in motion. Panic is all around, the Nasdaq is down, and also the stock market. BTC, altcoins, and LUNA are all dropping.
A long thread that looks at what happened in the last 4 days
— Route 2 FI (@Route2FI) May 12, 2022
What Happens Next?
Finally, the next step is that attackers sell $650M UST on Binance. This results in a huge de-peg. Find out more about the UST de-peg in our article. Now the LFG starts to act, and they start selling off BTC and buying UST, to restore the peg.
Also, this is exactly where the death spiral starts.
- The attackers dump UST.
- LFG keeps selling BTC and buying UST, to restore the peg.
- The BTC drops because of high sell pressure.
- Anchor deposits dwindle because people want out. This creates a high sell pressure on the UST and it de-pegs even more.
As a result, this leads to the LUNA price collapsing out of fear of how LUNA/UST works.
This goes on and on, and that’s how the LUNA price is where it is at right now. At $0.00000843.
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