The epic crash of Terra (UST) and Luna seems to be the biggest crash in the history of crypto. Here is what happened and why.
Things that happened to UST and Luna are the biggest scandal in crypto for a long while, if not for all times. UST had grown to be the third largest stablecoin, Luna had been performing rather well either, and then some terrible things happened.
Somebody launched a coordinated attack on UST, probably having gained more than $800 million in just one day. And now both tokens dropped almost 100% of their prices, and have been excluded from popular crypto exchanges.
Many investors have lost millions of dollars. And it had a tremendous impact on the crypto market, having dragged it down as investors started losing their faith in cryptocurrencies.
It is still unclear whether Terra and Luna are able to recover from crash, thus it is even more interesting to try to figure out what happened. And can it happen again to some other token millions of people have invested in.
The anatomy of the Terra and Luna crash
The Terra blockchain, which features the UST (TerraUSD) stablecoin powered by the LUNA token, came to a halt for the second time in 24 hours amid the depegging of the UST stablecoin.
UST, which is programmed to maintain its dollar peg at $1, went as low as $0.11, having lost its dollar peg and placing LUNA and itself into a death spiral.
LUNA has fallen 99.9 percent from its all-time high, trading at $0.00004586 at the time of writing. Its all-time high was $119.18 on April 5, 2022.
So basically, in just over a month, more than $41 billion in value has been eviscerated.
How were Terra (UST) and Luna linked before crash?
To understand what happened with UST and LUNA, let’s dive into the relationship between the two tokens on the Terra blockchain.
UST is an algorithmic stablecoin supported by Luna token.
Luna tokens are used for staking and mining UST stablecoin on Terra blockchain. UST is programmed to be minted when an equivalent quantity of LUNA is burned.
So it is important to understand the main difference between UST and two other prominent stablecoins – USDT and USDC. Unlike those two which are pegged directly to US Dollar, the Terra’s UST was supposed to be controlled and maintained solely by its underlying asset, i.e, Luna token.
UST was able to maintain stability through a 1:1 mint and burn ratio with LUNA.
It was achieved by burning an equal amount of LUNA to mint the equivalent amount of UST.
What could go wrong with UST and Luna?
UST’s survival was fully dependent on LUNA’s market demand.
Once the market started to lose confidence in both tokens, the investors began to redeem UST for LUNA in large volumes.
How did de-pegging of UST happened?
As cryptolife.report already mentioned, a mysterious whale launched an attack at UST on May 7. That was a one time huge $85 million swap from UST to a dollar-pegged stablecoin USDC in a Curve pool.
That was a huge amount of coins. And some of the traders who watch the market closely interpreted that as a signal. They started withdrawing their assets in UST. As it turned out, that was exactly what the outspoken attacker had in mind.
UST immediately began trading slightly below its peg on Binance. When traders saw its price as low as at $0.985 the withdrawal rate increased. There were some efforts to buy out some UST for the market high price from Terraform Labs, which has built the entire Terra network, reportedly, but the traders ignored that completely.
The next day was the breaking point.
Why couldn’t they save Terra with their reserves?
On May 8, enter the Luna Foundation Guard (LFG) – an organization that is supposed to sustain both Terra and Luna with huge financial assets, primarily accumulated in BTC.
LFG announced it was deploying $1.5 billion of its reserves. It seems like a sum of money enough to save Terra and Luna from crash, isn’t it?
Roughly half of that amount was loaned in BTC to market makers to be sold to defend UST’s peg. Another $750 million of UST were there to buy back BTC after the volatility subsided.
That was the plan.
And didn’t work. Because of the whopping $2.86 billion that had already been removed from the Anchor protocol. That’s a part of the Terra’s blockchain that pays out a yield of up to 20% of UST depositors.
What happened to Terra and Luna next?
UST’s peg continued to break, with its price falling to $0.60 on Binance the next day.
As more liquidity providers exited with whatever they had left, the only way for people to exit was by redeeming LUNA for UST. That basically meant minting LUNA in enormous scales.
This set the death spiral in full swing, as the circulating supply of LUNA hyperinflated 8190 percent from 386 million to 32 billion in just over 48 hours.
And then UST de-pegged drastically down to $0.225 on Binance and other exchanges. The price of LUNA dropped to $0.01, losing 100% of its values.
Massive blockchain attacks could follow the crash of Terra and Luna
The large-scale erosion of value on the Terra network left it vulnerable to a 67% attack.
Attackers could theoretically steal the remaining assets from the network while its liquidity and staking reserves were low.
Terraform Labs halted the blockchain temporarily on May 12. “Terra validators have decided to halt the Terra chain to prevent governance attacks following severe inflation and a significantly reduced cost of attack,” they claimed.
Although the chain came back online for a few hours, it was “officially halted” a few hours ago, with validators now coming up with a plan to reconstitute it.
Could Terra and Luna survive the crash?
It is yet unclear how the Terra and Luna crash could resolve. But it is obvious that many traders and financial institutions who had invested with UST and Luna saw the value of their investments completely eroded.
The main conclusion here is obvious.
UST, while claiming to serve as a decentralised medium of exchange, showed its model is fairly centralized. Due to its reliance on Luna and the whole concept of “algorithmic stablecoin”.
Further, some crypto analysts now believe the Terra and Luna crash will influence and extend the depth and length of the current bearish sentiment in the crypto market.
And it seems like the perfect time for Bitcoin maximalists to step up. The only truly decentralized cryptocurrency out there is the only one with undoubtful chances for recovery.
It is impossible to imagine any kind of coordinated attack that could bring down Bitcoin or crash it down like Terra and Luna this week.
Bitcoin’s only issue is its volatility. But if can eventually fade out as soon as investors stop seeing Bitcoin as the tool to hedge inflation risks.
And that’s why Terra and Luna crash is probably the biggest in crypto’s history – because it will help scare random investors of the crypto market. So Bitcoin could remain on its path of bringing us to the world of truly decentralized finance.
