This Week in Crypto – The Fall of Terra (LUNA)

With hundreds of new cryptos constantly popping up, it's really hard to keep up with all the news and major updates. From 99.99% falls in price and 1000% gains, to updates about crypto regulations in different countries, find the most recent news, updates, gainers and losers, and more about the trending cryptos and prices on the market right now.

Trending coin of the week - Terra (LUNA)

All the way from $119 to $0.00002 in just less than a month. Terra (LUNA)'s price dropped 99% mostly due to the result of the depegging of the stablecoin UST which lost its peg and dropped to around $0.2. Let's have a look at what happened -

Here are 4 things that happened before this attack:

  1. The attackers shorted 100,000 BTC on Gemini
  2. They make a $1B UST deal OTC
  3. Luna Foundation Guard (LFG) bought BTC in the previous months as a defense mechanism to protect the peg
  4. The announcement of the switch from 3-pool to 4-pool
This Week in Crypto
Image Credit – Freepik |

Let’s start with what happened to Anchor. Terra’s high-interest protocol, Anchor, began with a consistent market interest rate of 20%. However, it was no longer “stable” once Proposal 20 was passed in March. It was thereafter completely reliant on its reserves. The interests would rise by 10% if Anchor’s reserves grew by 10%. If Anchors’ reserves fell 10%, the interests would fall 10% as well.

As of Anchor’s history, there have always been more lenders than borrowers. However, due to the oversupply of lenders, the interest rate was predicted to decline 1.5 percent per month.

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Holders began to leave as interest rates were predicted to decline. The number one scenario for UST was to be deposited in Anchor, but even that was beginning to shift.

The majority of the people began leaving and now, they had two options, Terra’s burn-and-mint mechanism or Curve Finance.

The burn mechanism lets holders to exchange 1 UST for $1 worth of Luna, allowing for depeg arbitrage. People may buy cheap UST and sell it for $1 worth of LUNA or vice versa when UST goes below $1, generating a profit.

Curve, the second option, lets you exchange stablecoins. Arbitrageurs go to Curve when a stablecoin depegs and swap the discounted stablecoin for an alternative that keeps its peg.

If you sell UST for USDT on Curve, extra UST will be added to replace the USDT. To correct the path, the pool begins to discount UST in the hopes of attracting arbitrageurs to execute the opposite transaction and rebalance the pool. In the instance of UST, however, the contrary was not the case. Nobody wanted to keep UST because its sole purpose was to be deposited in Anchor, which had lately begun to falter.

Then comes the significant Curve sell-off. For dumping $85 million in UST on Curve, a single wallet sparked suspicions. Due to the $85 million trade, the 3-pool was slightly out of balance. To bring the Curve pool back into balance, 50,000 $ETH was sold and 20,000 $ETH was given to Binance.

Next, rumours about what’s going on are swiftly spreading on Twitter. This results in a huge number of withdrawals from Anchor Protocol, a lending market that rewards users who deposit UST with high interest rates. This appeared to start the de-pegging process. During the weekend, Anchor’s total UST deposits fell from $14 billion to $11.2 billion.

Anchor Deposits
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The peg is now fluctuating between 0.987 and 0.995. This has led to accusations that the depeg was a coordinated attack within the Terra community. It’s common for stablecoins to fall into this range before swiftly rebounding back up, but the peg never fully recovered in this case.

As a result, LFG (Luna Foundation Guard) is withdrawing $150 million in UST from Curve’s 3-pool in preparation for the new 4-pool. The attacker now drains the Curve pool with $350 million in $UST purchased OTC. Curve currently has no liquidity.

With new suspicions spreading swiftly, anchor deposits are starting to plummet from $12 billion. The peg has been dropped to $0.97. Furthermore, the stock market has plummeted, causing BTC to fall in value, leading altcoin prices to fall, and LUNA to plummet to roughly $60. Luna currently has an ATL of $0.00002 at the time of writing.

They have $650 million remaining after spending only $350 million on the attackers. They begin selling this amount on Binance, resulting in a significant de-peg over the current one.

To try to restore the peg, the LFG is now selling BTC and buying UST. The attackers begin to dump UST, while the LFG begins to purchase UST (by selling huge amounts of BTC leading to a drop in its price due to high sell pressure). Note here that the attackers made a profit since they shorted 100,000 BTC on the Gemini market, and the price is currently falling. UST is now de-pegging even more.

Terra Luna
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Anchor deposits begin to descend faster than previously, with tens of millions falling every minute. As the price of UST falls, all of the UST withdrawn is being moved to be sold. This puts new sell pressure on UST, causing it to de-peg even further. Because more UST is sold, there is more LUNA in circulation, lowering its price. The price of LUNA is suddenly plummeting.

Short sellers have begun to sell LUNA, further lowering its price. On FTX, they start shorting UST as well. As the price of UST and LUNA plummets, exchanges begin to prohibit UST withdrawals.

LFG eventually realises they can’t do much more and lets the peg drip. Do Kwon tweets that they’re about to announce a recovery plan at this time. Thousands of individuals have voiced their concerns with the proposal on Twitter. LUNA is currently trading at less than $30. The market reacted quickly to some minor details, as the plan did not appear to be solid enough to the public, and LUNA is now trading in the $10 level.

The whole rescue plan has yet to be released. Do Kwon organises a rescue plan the next morning. It wasn’t really a plan; it was just a talk, and the public were not happy. Do Kwon also implies that the algo-model will be dropped in favour of something else. LUNA’s price has now dropped to the $1 area and is still on the declining death spiral.

In addition, Binance has removed all LUNA and UST trading pairs. All of the exchanges are gradually delisting those pairs, and fear is setting in. UST dropped as low as $0.13 yesterday, and it’s now hovering around $0.2.

The Terra blockchain was likewise halted at block height 7603700, resumed, and then halted again at block height 7607789 during this time. Terra finally began block creation after several hours, with on-chain swaps disabled and IBC channels disabled. The wormhole bridge was temporarily offline, however it was shortly updated.

Do Kwon creates a thread in which he expresses his thoughts and provides a link to Terra’s Research Forum, where he typed down his “Revival Plan.” Terra’s community, he claims, must rebuild the chain, and validators should reset the network to 1 billion tokens, which would be distributed as follows:

  • LUNA holders before the depegging event
  • UST holders
  • Luna holders at the final moment of the chain halt
  • Community Pool

400M (40%) to LUNA holders before the depegging event. The new chain should be community owned. Preserving decent ownership of the network in its strongest believers and builders is important.

400M (40%) to UST holders proportional to the time of the new network upgrade.

100M (10%) to Luna holders at the final moment of the chain halt – last minute marginal Luna buyers should be compensated for their role in attempting to provide stability for the network.

100M (10%) to the Community Pool to fund future development.

After this proposal, LUNA finally sees some uptrend (from $0.00001 to $0.0005 at the time of writing) whereas UST remains the same.

You might wonder how this attack could be avoided. If the 4-pool had already been operational, clearing would have been far more difficult, as the 4-pool alone would have cost $3 billion instead of the present $350 million. As of who is behind all this, massive rumors about Blackrock and Citadel are spreading.

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This Week’s Gainers and Losers


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