At the time of writing, both LUNA just hit a new low of US$0.13 and UST is off peg and holding at US$0.6. If you don’t know what happened to LUNA, It’s time to get out of your cave.
Massive withdrawals from Anchor Protocol and the selling of UST have caused huge downward pressure on the stablecoin. The pressure caused the stablecoin to deviate from the dollar peg and caused a market-wide FUD on UST.
The UST depeg then sent LUNA into a death spiral as LUNA is automatically sold in the event UST lose the dollar peg. This catastrophic event sent LUNA from an ATH of US$119 down to as little as US$0.13.
What triggered the crash?
The million-dollar question is: what triggered the crash? Many conspiracy theorists suggest that it is a well-coordinated attack done by BlackRock and Citadel Securities.
But both Citadel Securities and BlackRock deny that they were behind the fall of UST.
Anyway, the attack was an interesting one. The attacker borrowed 100,000 BTC and sold a small portion of 15,000 BTC to LFG (Luna Foundation Guard) for UST. The attacker then sold the rest of the BTC into the market and shorted LUNA.
The culprits then proceed to dump the UST on Curve causing a bank run and at the same time, UST started to depeg from the dollar. LFG responded by selling BTC in an attempt to defend the peg. This resulted in a downward pressure on BTC and UST to be less collateralized.
The attackers continued to sell UST on CEXs and caused a number of CEXs to suspend withdrawals on UST. This fueled the FUD of a bank run and the whole community continue to dump UST. UST started to stray further from the dollar peg and LUNA started sinking.
Where is Stable Kwon?
Last I checked, Do Kwon is still working on a recovery plan for UST and has yet to come out with any concrete plan that is able to save LUNA.
The last update from Do Kwon showed that he endorses the community proposal number 1164 which would basically increase the mining capacity from the current US$293 million to approximately US$1.2 billion.
This change to the system would allow more LUNA to be minted when UST depeg from the dollar and it would create a scenario where UST would be less likely to depeg.
On the other hand, this proposal to protect the UST dollar peg would inherently turn LUNA into a hyperinflationary token. Many loyal community members are against this proposal as it would create an inflationary death spiral for LUNA.
Do Kwon also hinted that UST would move from being a partially collateralized algorithmic stable to a trial and tested fully collateralized stablecoin model.
Larry Cermak, VP of Research from The Block, leaked some details of what might be the original recovery plan that Do Kwon mentioned in his tweets.
The plan was to get a billion-dollar bailout from some of the biggest VCs in crypto. It includes some of the wealthiest VCs like Jump Capital and Alameda Research.
The deal was to raise a target of US$1 to US$1.5 billion in capital. The VCs would be allowed to purchase spot LUNA at a 50% discount but the catch is that the LUNA would come with a 1 year and it would be linearly vested over 1 year.
Unfortunately, Luna Foundation Guard did not manage to get Alameda Research on board and the whole plan failed to go through.
Will Luna ever make it back to its all-time high?
At this point in time, I’m very bearish on LUNA. Due to how the way UST is algorithmically pegged to the dollar, LUNA would continue to flood the market until UST reach the dollar peg.
This selling pressure on LUNA would cause the price to drop even further from the current price. But UST is also not going to reach the dollar peg because users from all over the world are cashing out UST for other Crypto/stablecoin.
As long as UST doesn’t reach the dollar peg, I foresee that LUNA’s price action would continue to dip. At the rate it’s dipping, it looks like even the Lunatics have lost faith in the project.
It was also revealed that Do Kwon was the co-founder of Basis Cash, a failed algorithmic stablecoin. It looks like Do Kwon already knew that UST was bound to fail and started to turn UST into partially collateralized. Sadly the collateral was not enough to cushion the attack.
Judging by the current outlook, all the early investors have lost faith in both Terra and Do Kwon himself. But then again, Solana has failed multiple times but it always bounces back stronger than ever. This might not be the end of Terra.
Unless Do Kwon is able to perform a miracle, I doubt LUNA would be able to recover back to its ATH anytime soon.
On the bright side, there was no report of network outage even though there were so many on-chain activities going on at the same time. If this incident happened in Solana, we would be seeing the 8th network outage and it would take hours for the network to recover.
This incident showed that Terra is able to handle massive traffic and it is one of the few blockchains that has truly been battle-tested.
I guess this whole Terra incident is a valuable lesson to many that no coin is too big to fail. The third-largest stablecoin got attacked and everything started to crash and burn.
I can’t stress how important it is to diversify your portfolio and always take profit along the way. While this might look like some boomer advice but doing so would help you safeguard your portfolio and limit the losses.
The number of people who put their life-saving on Anchor Protocol / LUNA is astounding and my heart goes out to everyone affected by this.
Times are tough and it isn’t worth taking your life over this bad trade. I believe we can all pull through together. Do not hesitate to reach out to us, our DMs are always open.
[Editor’s Note: This article does not represent financial advice. Please do your own research before investing.]
Featured Image Credit: Chain Debrief
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