Some are calling the Terra LUNA crash the largest crypto meltdown of all time.
In just a few days, the Terra LUNA stablecoin project has fallen from a top 10 cryptocurrency to almost worthless.
A week ago, Terra and UST had a combined market cap of $47 billion, making them massive projects by anyone’s standards. Terra had a market cap of $29 billion and UST had a market cap of $18 billion.
What happened to Terra LUNA
One afternoon, the project was taken down by traders who were sophisticated and well funded.
They did this by pushing on the project’s greatest weakness, which was a lack of collateralization.
Let’s break it down to see how it all went down.
The UST stablecoin is created by buying the Luna token and then burning it. This reduces the supply of Luna over time and drives the price of the token up.
If a trader wants to get a redemption, they can burn UST and mint a corresponding amount of Luna.
The attackers knew that if they broke UST’s dollar peg, the De-pegging would create uncertainty in the ecosystem and cause a lot of UST redemptions, which would be bad.
On May 7th 2022, the attacker swapped $85 million worth of UST into USDC on a decentralized exchange.
The attacker(s) then continued to swap tens of millions of dollars worth of USDC, which put a constant downward pressure on the price of UST. Initially, the peg held around $98, but for a few hours it seemed like everything was going to be fine.
Things started to get bad
As the attack continued, the sentiment turned negative and investors withdrew several billion dollars worth of UST from Anchor and began to redeem their tokens for Luna.
As a result of the UST de-pegging from the dollar, Luna’s price went down, leading to more instability. When investors redeemed their stablecoins and exited the Terra ecosystem, it caused even more problems.
As more and more people redeemed their Terra for Luna, the value of Terra decreased until it was worth less than the UST.
When it became clear that not everyone would be able to redeem their UST, it also became clear that Terror would not be recovering.
With a circulating supply of about 7 trillion Luna tokens and that number continually increasing, there is no chance for Terror to make a comeback.
Just before the attack, Luna had a circulating supply of only 350,000,000 tokens. Luna is now trading at a fraction of a penny, meaning anyone still holding the token has effectively lost all their money.
But what are the broader implications for the cryptocurrency ecosystem?
The large dip in the markets was at least partially caused by Terra selling $1.8 billion worth of BTC in a failed attempt to defend the peg.
The recent Terra Luna meltdown is likely to attract the attention of regulators, with Janet Yellen already mentioning the incident. A statement from the SEC is probably forthcoming.
Below shows a recent article headline from Times Magazine.
Terra’s founder past failed stablecoin projects
Do Kwon, the owner of Terra, has also failed with other stablecoins in his cryptocurrency portfolio, not just the recent LUNA.
He is known for using Rick Sanchez as a pseudonym when he released an algorithmic stablecoin called Basis Cash (BAC). BAC was ready to become popular because it was designed to peg to the US dollar.
BAC’s failed stablecoin project left a US$54.5 million footprint. The project was not tested properly as a stablecoin or cryptocurrency during the pilot period, and was shut down due to some high-profile SEC risks.
Do Kwon planned to distribute the BAC token through yield farming with liquidity to BAC-DAI. This would launch the defunct stablecoin into the DeFi era.
The BAC protocol was designed to expand and contract the supply of Basis Cash, Basis Bond, and Basis Share in a way similar to how central banks trade fiscal debt to stabilize purchasing power. However, this failed stablecoin was never intended to be used as a medium of exchange.
Is there any chance that Tara can recover?
I don’t think the blockchain community will recover from this trust meltdown. We are truly sorry for anyone who lost money in this unprecedented event.