One of the biggest crashes in cryptocurrency history as stablecoin go to zero value in a week!
TerraUSD (“UST”), the world’s third largest stablecoin, has freefallen in just one week, making the term “stablecoin” sound rather ironic.
What is stablecoin?
UST is what’s known as an “algorithmic” stable coin issued by a Korean company called Terra (founder Do Kwon), whose value is anchored 1:1 to the U.S. dollar. Instead of maintaining the peg to the U.S. dollar through U.S. dollar assets such as cash or bonds, UST is anchored through the issuance of a token called Luna, which investors buy in fiat currency to hold UST.
The stabilized coin works as the following: if the UST price falls below $1, investors can “destroy” the UST, that is, permanently remove it from circulation, in exchange for $1 worth of Luna coins, which will reduce the supply of USTs and boost their prices; conversely, if the UST rises below $1, investors can “destroy” Luna coins in exchange for $1 worth of USTs, which would increase the supply of USTs and push their price back down to $1.
Simply put, if the price of LUNA is $20, then you can exchange 1 LUNA for 20 USTs. So what is the use of converting to USTs? Terra designed a lending platform Anchor Protocol for UST depositors and promised investors an annualized return of up to 20% on Luna purchases, attracting a large amount of capital to enter the market and causing the value of LUNA to rise.
The Sniping of “Crypto Soros”
In 1997, the legendary financial hitman George Soros and his giant allies rounded up the Southeast Asian bubble market, selling off the Thai baht and quickly depleting the Bank of Thailand’s $30 billion in foreign exchange reserves, eventually forcing the baht into a floating exchange rate system and pushing the Southeast Asian nation further into the abyss of financial crisis.
This landmark event in history has been studied as a textbook over and over again. But who would have thought that the same story would be played out again in the crypto market, which is only 10 years old, and broadcasted in “real time” in front of everyone through the on-chain traces. The cryptocurrency community is calling this incident a deliberate attack by “Soros in the cryptocurrency world”, and the sniper’s “modus operandi” is the same as that of George Soros, the hedge fund magnate.
LFG (Luna Foundation Guard – Terra’s non-profit organization), the core team of Terra Eco, in order to form its own strong 4Crv pool, announced that it will adjust the UST-3Crv liquidity pool (UST’s main on-chain trading venue) on May 8.
As a result, in the early hours of May 8, LFG removed $150 million of UST liquidity from the UST-3Crv pool. Those who are interested note that to drain the UST liquidity at this point would only take about $300 million.
“Crypto Soros” used this window of time to sell off a large amount of his USTs, causing the UST price to deviate from $1. This decoupling event then triggered a massive panic sell-off by UST holders, causing the UST price to fall at an accelerated rate. At this point in the story, it could still be considered a “mini-decoupling event” for USTs. If this were to hold steady and not move forward, it would be a minor splash in the history of cryptocurrency development at best, and the likelihood of “going out of the loop” is quite small.
But in retrospect, the “mini-decoupling” was the prelude to the “epic riot” that followed in the market.
Anchor Protocol funds run on massive UST due to panic
Confidence is more crucial than gold, especially for an algorithmic stable coin like UST that relies on ecology to grow. However, starting on May 8, panic spread quickly among UST and Luna holders, and a large amount of USTs locked in the Anchor Protocol flowed into the market, further causing a sell-off in USTs.
At this point LFG tried to “back it up” with bitcoin, tweeting that it would “loan” $700 million of its own bitcoin savings in hopes of maintaining UST stability through mutual exchange between UST and bitcoin (rather than UST and the plummeting Luna) stability. But Do Kwon disagreed with LFG on this point, arguing that the UST was still stable at $0.95 and not decoupled, so there was no need to use bitcoin yet.
For Do Kwon, $0.95 may have been enough to justify the stability of the UST, but the majority of the market didn’t think so. They saw the fact that the UST was slow to return to its anchor position of $1. The “small absence” of the UST was seen as a “big risk” to investors, and in a time of heightened risk in the financial markets, few people can afford to be as exposed to potential crises as they were in the past.
So the result was that the UST began a massive sell-off, dropping right below $0.95 and sailing down into uncharted territory.
UST prices fall, investors run down USTs, converting them into Luna, Luna supply increases, prices plummet, and then trigger a sell-off by Luna holders …… This creates a “Death Spiral.” The value of USTs was originally dependent on investors real money to buy Luna to support it, once the value of Luna is gone, the value of UST also ceases to exist.
Institutional bailout? Rumors abound!
After the “scary 2 hours” of the UST departure death spiral, there were sometimes rumors that Jump, Alameda, and others had struck some behind-the-scenes deal and were ready to put in $2 billion to start the rescue. Subsequently, an address beginning with [0x6c] did receive a $2 billion transfer, but there was not much action and the address did not appear to be connected to the UST event.
Also, Binance seems to be involved in the UST defense. According to Hasu, the lead manager of Uncommon Core, Binance forced a trading floor price on the UST order book, preventing users from submitting orders at the $0.70 threshold for an extended period of time.
Soon after, news about LFG’s financing resurfaced, and according to sources, LFG is seeking help from institutions to raise $1 billion to support UST. according to Larry at The Block Research Institute, the details of the financing known so far are that Jump Trading, Celcius, and Jane Street have agreed to the financing, with a commitment of about $700 million. The commitment is about $700 million, and Alameda Research has not yet agreed. The terms of the institution is to get the Luna spot at a 50% discount, lock up the position for one year, and unlock it on a monthly linear basis after one year. But Larry also stressed that the financing has not yet been confirmed and that everything is subject to change.
Where do Terra Developers go?
Terra founder Do Kwon tweeted a response to the sharp drop in LUNA and the de-anchoring of UST. Do Kwon first acknowledged the failure of the current situation and the difficulties faced by the team, and then proposed a solution. Terra Research announced a proposal to increase the UST stablecoin minting capacity to $1.2 billion.
Do Kwon believes that the first priority now is to keep the Terra chain stable and to keep as many developers as possible. Then we can explore the issue of a decentralized currency. That said, Do Kwon is prepared to abandon UST for now, but keeping the Terra ecosystem without a stable coin could pose a huge risk and cause value destruction.
First, Terra was built with UST in mind early on, and all of the eco-applications it has led the development of point to a common metric: to get UST adopted on as large a global scale as possible, so most of the DeFi projects are closely tied to it. If UST is abandoned, then most of the protocols may not function properly. It would need to be redeployed, which would require time, money and manpower, and would be a huge challenge for developers.
Things have festered to the point where the Terra ecosystem has begun to fragment and many of the protocols on Terra are exploring a new way out – migrating to other public chains.
According to sources, Spire Quantum is working with many Terra projects and has offered them an olive branch. Spire Quantum is ready to help them migrate quickly to other private blockchains with $20 million in funding and a wealth of resources to help them migrate.
Erik Hensen, CEO of Spire Quantum, also issued a statement saying that Terra is no longer the best option for developers and some are actively seeking a way out.
Summary
This is not the first time Luna has been in a death spiral, as it was also severely de-anchored on May 29th of last year, when the price dropped to $0.85. Luna and UST survived thanks to LFG’s rescue efforts. Since then, LFG has made a number of changes in order to prevent something like this from happening again, including a new backing mechanism for USTs.
In fact, buying native Tokens from Bitcoin and other Layer1 public chains as backing is not the wrong choice, but it will take some time to achieve full delivery of this new mechanism. Had LFG’s $4 billion 4Crv pool been assembled, crashes like this one might not have happened at all. But unfortunately, the market did not leave LFG and Do Kwon, the Luna maniac, enough opportunities to redeem themselves, and Luna lost this crash to time.
However, this terrible collapse story of Luna coin is neither the first nor the last time in the capital market.