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Posted 1 min ago | by Catoshi Nakamoto
How did TerraUSD lose its peg? And how did Luna, a coin that just a few months ago had over a Forty-One Billion market cap, fall to zero? There are lots of theories floating around the internet and we’re going to explore them. So, let’s start at the beginning…
Terraform Labs was founded in by Do Kwon, a Stanford grad and former Microsoft software engineer, and Daniel Shin, who spent time consulting for McKinsey after graduating from The Wharton School of Economics. Fun fact, Daniel was on the same Model U.N. team in high school with Robinhood CEO, Vlad Tenev, who was also one of Terraform’s original seed investors… These guys look like the kinda guys you’d trust with your money, right? Right?!
After their Initial Coin Offering for TerraLuna in Twenty-Eighteen, the team spent two years building a payment app called Chai. And Daniel stepped away from Terraform to go run that side of the business. They expanded their “Lunatic” Community, releasing TerraKRT, which was pegged to the Korean won, and TerraKRW, pegged to Mongolian currency, and TerraUSD, pegged to the US Dollar.
Touting the ease of operability and the effortlessly ability to transfer funds between nations, Terra stablecoins and its payment app, Chai, were quickly adopted by Korea’s top fourteen banks, number one convenience store, and largest game developer, just to name a few. That’s over Two Million users spending over a Billion Dollars using TerraKRT according to the Terra website. And in the great U.S. of A. millions of users were soon using TerraUSD to invest in synthetic assets on Mirror and earning an insanely high yield of Twenty Percent on Anchor Protocol when they launched in 2020 and 2021 respectively.
All the Terra stablecoins are algorithmic. Whenever Luna is swapped for UST, part of the Luna is burned, decreasing the supply of Luna. If UST falls below a dollar, Luna holders are supposedly incentivized to swap UST for a dollar’s worth of Luna, therefore making a profit. This is of course predicated on the belief that Luna has long term value. More on that later…
Soon the buzz was getting undeniable as the Terraform began to attract more and more investment money.
After the May Twenty-Twenty-One crash, the price of Luna was trading around Five Dollars, and over the next year, pumped to over a Hundred-And-Sixteen. The “Lunatic” community was going nuts, hypothesizing higher and higher price predictions. Terraform signed a five year Forty Million Dollar deal with the Washington Nationals, which allowed fans to make purchases with UST.
Mike Novogratz of Galaxy Digital even got a tattoo of Luna on his arm. I guess millions of dollars wasn’t enough for Mike, he had to invest a little blood into the project as well…
But while diamond hands were tweeting they’d never sell their Luna bags… Some were worried that Terra’s algorithmic stable coins weren’t exactly… stable…
Various experts across the crypto ecosystem were Terra-fied (see what I did there…?) about red flags in the ecosystem. First, Two-Thirds of the demand for UST was coming from Anchor Protocol (remember that’s their in-house lending platform). And lending demand was way higher than borrowing demand. Which means that lots of people wanted to lend out their UST and earn those sick Twenty Percent returns, but not that many wanted to actually borrow UST. There were concerns another borrowing protocol could take away liquidity from Anchor, or the reserves might not be sufficient to defend the peg.
And the reserves weren’t originally part of the plan, guys. That was something Terra added after the fact, which suggested their original ecosystem maaaaybe wasn’t sufficient to defend the peg… Not good… Many were concerned what would happen if there was a run on Luna… Especially since Do Kwon had an evil genius plan to try to eventually hold Ten Billion Dollars worth of Bitcoin in the reserves, saying that then “The failure of UST is equivalent to the failure of crypto itself.” Basically Do Kwon wanted to take all of crypto hostage to support the UST peg.
But instead of listening to these valid concerns, Do Kwon actively mocked anyone who doubted him, despite the fact that it later came to light that Do Kwon already tanked a failed stablecoin back in 2020! So really, he should’ve been asking for all the help he could get…
So we set the scene for you guys. Let’s get to what in the heck actually happened that led to a free-falling Luna and UST, and eventually, Do Kwon’s demise.
The end of March of Twenty-Twenty-Two – the Luna Foundation Guard begins Do Kwon’s fateful plan and starts buying Bitcoin to fund the reserves that back UST. And on April First, Terraform announces a partnership with Frax Finance, creating a Curve stablecoin pool called “4Pool.” This was Do Kwon’s attempt to disrupt the Dai stablecoin by moving activity away from another Curve stablecoin pool called “3Pool.”
This is important because about a month later, on the infamous day of March Eighth, The Luna Foundation Guard moves A-Hundred-Fifty Million dollars’ worth of UST into 4Pool, thereby majorly decreasing the liquidity in 3Pool, leaving themselves open to attack…
Meanwhile, an unknown Attacker (more on that later…) had borrowed A Hundred-Thousand Bitcoin from Gemini (something Gemini has sense denied, despite the transaction being in their order books…), quietly swapping a quarter of that Bitcoin for UST. Many are speculating that the Attacker sold some of the borrowed Bitcoin to Do Kwon in exchange for UST, but this isn’t confirmed.
When the Luna Foundation Guard pulled the liquidity, the Attacker used part of their Billion Dollar position in UST to drain the curve liquidity, starting to de-peg UST, which hits about Point-Nine-Seven-Two. Not completely de-pegged, but enough to rattle the community. The Luna Foundation Guard starts selling their Bitcoin to defend the peg, and then the Attacker sells the rest of their UST on Binance, causing everyone to panic sell their UST.
The whole chain gets congested, and the centralized exchanges suspend withdrawals of UST. But this just turns the panic selling into a full-on bank run. But now we have Bitcoin freefalling Twenty-Five Percent, and the panic gets more and more intense. People are liquidated, UST completely loses its peg, and Luna swan dives off a cliff. Eventually going to zero.
After days of silence, Do Kwon finally made a statement, basically confirming UST has lost confidence and is dead. But he still thinks there’s an opportunity to repair the Luna community and plans to reimburse holders of Luna and UST. Hopefully he won’t be reimbursing them with another algorithmic stable coin…
But all jokes aside, here’s the thing, guys… I know it’s fun to sit here and go through all the drama. Especially if you weren’t holding Luna or UST the last couple days. But people’s lives were ruined in a week. There’ve been reports of suicides. Do Kwon’s wife had to ask for police protection because people have been showing up at their house. This is nuts.
Now we’re still not a Hundred Percent sure who took advantage of this situation. Some have suggested it was Justin Sun because he put out a slightly sketchy tweet a few days before.
But that doesn’t really make sense because he’s launching his own algorithmic stable coin. So why would he do something that would potentially delegitimize algorithmic stable coins right before his launch?
It could’ve been a whale who didn’t like Do Kwon’s evil genius plans to hoard Bitcoin.
But I think the only people ruthless enough to take down an entire blockchain ecosystem and ruin millions of people’s lives in the process are… Blackrock and Citadel.
They’ve denied they were involved. But of course, they have. I keep telling you guys these hedge funds don’t care how much irreparable damage they do to ordinary people. As long as they make a profit, they’ll be laughing all the way to themselves- I mean- the bank while you struggle to pay your mortgage and feed your family. They are vampires on the world’s economy. And they need to be stopped.
And you know the fed is just going to use this as another excuse to regulate stablecoins. On Thursday, Felon Yellen asked lawmakers for a “consistent federal framework” on stablecoins to address risks. Pretty convenient timing. The fed has been chomping at the bit to regulate stables. They already cracked down on Blockfi and Celsius. And now the third largest stablecoin gets sabotaged in a week? Then on Thursday Tether momentarily dipped as well. Nobody panic; it very quickly regain its peg.
It just seems like there are a lot people behind the scenes, working together to instill fear into the crypto community and make billions of dollars at the same time. They may be laughing now, but when people finally get fed up and start showing up to their offices asking what happened to their money, it won’t be quite so funny… Anyway…
Both Luna and UST’s prices have recovered slightly over the weekend. And by slightly, I mean Luna’s basically at meme coin prices right now. It’s nowhere near the all-time high. But Binance and FTX did re-list Luna, and the hopium seems to be alive on Twitter…for now.
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