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In May 2022, bearish crypto conditions resulted in the depeg | In May 2022, bearish crypto conditions resulted in the depeg and subsequent collapse of [[LUNA]] and UST which crashed from over $80 to $0.69 in the space of five days. UST is the [[stablecoin]] which can be minted using LUNA as part of the [[Terra]] ecosystem which was founded by Do Kwon. | ||
The collapse wiped over $40b in value from the Terra ecosystem and the wider cryptocurrency market subsequently declined by over 20%. | |||
== Background == | == Background == | ||
UST is | UST is an algorithmic stablecoin which can be minted by burning LUNA. The redemption mechanism lets a user mint LUNA by burning UST which put further sell pressure on the stablecoin peg. In case of a depeg event, this mechanism adds severe sell pressure on LUNA as more people burn UST to then sell LUNA. | ||
To alleviate | To alleviate concerns about a death spiral, the Terra foundation purchased several billion dollars of Bitcoin that could be used to help stabilize the peg in case of pressure on UST and LUNA.<ref>https://dashboard.lfg.org/</ref> | ||
== | == Timeline == | ||
== Rescue efforts and second depeg == | === Initial depeg === | ||
As concern for a death spiral kept mounting, The Block reported that the Luna Foundation Guard was raising over $1b to prevent any further damages<ref>https://www.theblockcrypto.com/post/145978/luna-foundation-guard-seeks-more-than-1-billion-to-shore-up-ust-stablecoin-sources</ref> | Over the 7th of May, 9 figures of liquidity was removed from the [[Curve Finance]] pool resulting in widespread panic and a depeg of around 2% which was quickly brought under control. Do Kwon implied on Twitter<ref>https://twitter.com/CaetanoManfrini/status/1523145923571814400</ref> there had been a coordinated attack to create panic and destabilize the peg by simultaneously removing funds from [[Anchor]] and Curve Finance. The Luna Guard Foundation also announced it had loaned $1.5b as an additional effort to protect UST.<ref>https://twitter.com/LFG_org/status/1523512201088143360</ref> | ||
=== Rescue efforts and second depeg === | |||
As concern for a death spiral kept mounting, The Block reported that the Luna Foundation Guard was raising over $1b to prevent any further damages.<ref>https://www.theblockcrypto.com/post/145978/luna-foundation-guard-seeks-more-than-1-billion-to-shore-up-ust-stablecoin-sources</ref> The deal would allow several large investment firms to purchase discounted and locked LUNA tokens. | |||
[[File:Binance UST-USDT Chart.png|thumb|Binance UST Chart]] | [[File:Binance UST-USDT Chart.png|thumb|Binance UST Chart]] | ||
When the price of LUNA kept declining, | When the price of LUNA kept declining, rumors spread that the deal had fallen apart and that the bailout would not be coming after all and UST further declined to a low of $0.22. LUNA also fell by over 90% to a low of $0.69. | ||
Do Kwon tweeted that Terra would increase the redemption capacity of UST to allow the peg to stabilize quicker.<ref>https://twitter.com/stablekwon/status/1524331171189956609</ref> This would result in more LUNA being in circulation, with some crypto twitter users estimating a 6x increase in circulating supply.<ref>https://twitter.com/pythianism/status/1524432742892507136</ref> From May 11th to 12th, it resulted in LUNA’s supply increasing from 1.5 billion tokens to 163 billion tokens.<ref name=":0" /> On May 12th, LUNA hit a low of $0.00079. | |||
On May 13th, Do Kwon released a Terra Ecosystem Revival Plan on the Terra forum.<ref>https://agora.terra.money/t/terra-ecosystem-revival-plan/8701</ref> If approved, this proposal would reset the network ownership to 1B tokens and have a new distribution plan. | |||
On May 14th, LUNA rebounded over 1,500% from lows and overtook UST market cap for the first time since the beginning of the depegging event. Terra announced over Twitter that a post mortem report would be coming as soon as possible.<ref>https://twitter.com/terra_money/status/1525226016972582912?s=21</ref> | |||
On May 16th, the Luna Foundation Guard released a Twitter thread detailing how they sold over $3b in assets to defend the UST peg.<ref>https://twitter.com/lfg_org/status/1526126703046582272?s=21</ref> | |||
=== Terra Ecosystem Revival Plan 2 === | |||
Do Kwon released a Twitter thread and governance proposal detailing the plans to fork Terra.<ref>https://twitter.com/stablekwon/status/1526258273820651520?s=21</ref><ref name=":1">https://agora.terra.money/t/terra-ecosystem-revival-plan-2/18498</ref> Under this new proposal, Terra would create a new chain and the previous chain would remain active under “Terra Classic.” | |||
UST would no longer be used and the chains would not have new algorithmic stablecoins. Terra Classic would have Luna Classic (LUNC) while the new chain would remain Terra (LUNA). | |||
Under this proposal the newly forked network will be distributed as follows:<blockquote>'''1,000,000 LUNA Tokens''' | |||
* 25% - Community pool, controlled by staked governance | |||
* 1% - Essential Developers emergency allocation, no lockup | |||
* 4% - Essential developers (1 year cliff, 4 year vesting thereafter, granted after launch traction) | |||
* 35% - All bonded / unbonded Luna, minus TFL at “Pre-attack” snapshot | |||
** For wallets with < 1M Luna: 1 year cliff, 2 year vesting thereafter | |||
** For wallets with > 1M Luna: 1 year cliff, 4 year vesting thereafter | |||
* 10% - Luna holders (staking derivatives included) at the “Launch” snapshot - 10% unlocked at genesis, 90% vested over 2 years thereafter | |||
* 25% - UST holders at the “Launch” snapshot - 10% unlocked at genesis, rest vested over 2 years thereafter | |||
</blockquote>If passed, the network has a planned launch for May 27th. The official vote on Terra Station went live on May 18th.<ref name=":2">https://station.terra.money/proposal/1623</ref> On May 20th, the vote sat above the pass threshold by a wide margin.<ref>https://station.terra.money/proposal/1623</ref> | |||
== Chainlink Oracle failure == | |||
On the 12th of May 2022, [[Venus]] on BSC and Blizz Finance on Avalanche were exploited for $13M and $6M respectively. It was revealed the LUNA oracle had a lower limit of $0.10. When the price of LUNA crashed to $0.00005, attackers were able to provide collateral and borrow a lot more than it was worth.<ref>https://rekt.news/venus-blizz-rekt/</ref> | |||
On the 15th of May 2022 Blizz Finance published a post mortem on Medium<ref>[https://medium.com/@blizzfinance/blizz-finance-post-mortem-2425a33fe28b Blizz Finance Post Mortem] - Medium</ref> So far there´s no official communication from Chainlink on the issue, some tweets<ref>https://twitter.com/stanikulechov/status/1525105477704634368</ref> claim: "Chainlink´s circuit breaker worked as expected". Chainlink´s documentation<ref>https://docs.chain.link/docs/selecting-data-feeds/#risk-mitigation</ref> exposes ways to mitigate risk, though the oldest version of such documentation from November 2021<ref>https://web.archive.org/web/20211105012157/https://docs.chain.link/docs/selecting-data-feeds/#risk-mitigation</ref> on Archive.org Wayback machine doesn´t include the suggested steps for risk mitigation. | |||
== Aftermath == | == Aftermath == | ||
US Treasury Secretary Janet Yellen mentioned the depeg event to suggest the need for further regulation of stablecoins.<ref>https://www.coindesk.com/policy/2022/05/11/ust-meltdown-hasnt-spurred-us-financial-stability-council-meeting-sources/</ref> | |||
Citadel and BlackRock denied involvement in the attack against Luna after rumors surfaced on Twitter that the two firms were involved in the attack.<ref>https://www.bloomberg.com/news/articles/2022-05-11/citadel-securities-says-not-involved-in-terra-stablecoin-crash</ref> | |||
Terra TVL went from $35b to less than $3b in five days.<ref>https://defillama.com/chain/Terra</ref> TVL for the entire DeFi industry declined by over 50%. From May 7th to May 11th, Anchor’s UST deposits depleted from $17b to $2.6b.<ref>https://defillama.com/protocol/anchor#</ref> | |||
As wider concerns for the health of stablecoins spread in the markets, Curve Finance saw a lot of traders swapping away from Tether's USDT, which made the stablecoin drop slightly to $0.95.<ref>https://cryptobriefing.com/tethers-usdt-stablecoin-loses-peg-amid-ust-disaster/</ref> Another algorithmic stablecoin called USDN also fell to as low as $0.78.<ref>https://blockworks.co/how-will-ust-crash-impact-other-stablecoins/</ref> | |||
Crypto markets also declined by over 20% with some currencies tied to the Terra ecosystem falling by over 60% in two days.<ref>https://decrypt.co/100102/not-just-terra-apecoin-avalanche-solana-shiba-inu-all-down-at-least-20-in-crypto-crash</ref> | |||
It was revealed that Do Kwon was the founder of a previously failed stablecoin project, [[Basis Cash]].<ref>https://www.coindesk.com/tech/2022/05/11/usts-do-kwon-was-behind-earlier-failed-stablecoin-ex-terra-colleagues-say/</ref> | |||
From May 9th to the 12th, LUNA supply has increased 35,000% as that is part of the mechanism to restore peg to UST.<ref name=":0">https://messari.io/asset/terra/chart/sply-circ</ref> | |||
Terra validators have decided to halt the Terra chain to prevent governance attacks following severe $LUNA inflation and a significantly reduced cost of attack. Terra blockchain was officially halted at a block height of 7603700.<ref>https://twitter.com/terra_money/status/1524785058296778752</ref>After patching the code and disabling validators, Terra blockchain resumed block production.<ref>https://twitter.com/terra_money/status/1524812171179327488</ref> | |||
An investor who lost over $2m visited Do Kwon’s house and left after questioning Do’s wife for his whereabouts.<ref>https://watcher.guru/news/suspect-who-invaded-terra-founder-do-kwons-home-reveals-his-motive?c=410</ref> | |||
South Korea's ruling party called for Do Kwon to attend questioning at a parliamentary hearing regarding the collapse.<ref>https://watcher.guru/news/heres-how-much-trouble-terra-do-kwon-is-in-following-usts-demise</ref> | |||
Terraform Labs legal team resigned and the company is using outside counsel.<ref>https://www.theblockcrypto.com/post/147390/terraform-labs-legal-team-resigns-after-ust-collapse</ref> | |||
South Korea’s government is seeking a $78.5m tax payment from Terraform Labs/Do Kwon.<ref>https://n.news.naver.com/mnews/article/015/0004700627?sid=101</ref> Kwon later stated they had no tax liabilities in South Korea.<ref>https://www.theblockcrypto.com/amp/linked/148177/terraform-labs-has-no-tax-liabilities-in-korea-do-kwon-says</ref> | |||
The Seoul Metro Police sought to freeze Luna Foundation Guard assets after finding clues of embezzlement.<ref>https://www.theblockcrypto.com/linked/148253/korean-police-seek-freeze-on-luna-foundation-guard-assets-kbs</ref> | |||
=== Firm losses === | |||
Several investment firms and venture capital funds suffered large losses. The exact amounts are difficult to verify. | |||
* Arca - Published investor letter in May 2022, describing the de-peg as a buying opportunity.<ref>https://www.coindesk.com/business/2022/05/11/crypto-fund-arca-doubled-down-on-ust-amid-stablecoins-collapse/</ref> | |||
* Delphi Digital - Rumors of $500m loss.<ref>https://members.delphidigital.io/reports/mapping-the-moon-an-overview-of-terras-ecosystem/</ref> | |||
* Arrington Capital - $100m UST yield fund.<ref>https://twitter.com/CoinDesk/status/1524506527368888320</ref> | |||
*Galaxy Digital - $300m loss (no mention of cause.)<ref>https://www.coindesk.com/business/2022/05/13/galaxy-digital-sees-quarter-to-date-loss-of-300m/</ref> | |||
*3 Arrows Capital - promoted and invested in LUNA. The CIO's Twitter posts implies that they lost money.<ref>https://twitter.com/zhusu/status/1525045033216397312</ref> | |||
== Sources == | == Sources == | ||
<references /> | <references /> | ||
[[Category:History]] | [[Category:History]] |
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