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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 | 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%. | The collapse wiped over $40b in value from the Terra ecosystem and the wider cryptocurrency market subsequently declined by over 20%. | ||
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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> | 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> | ||
== Initial depeg == | == Timeline == | ||
=== Initial depeg === | |||
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> | 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 == | === 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. | 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, 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. | 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. | |||
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 | |||
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 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. | 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> | ||
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> | 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> | ||
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* 25% - Community pool, controlled by staked governance | * 25% - Community pool, controlled by staked governance | ||
* 1% - Essential Developers emergency allocation | * 1% - Essential Developers emergency allocation, no lockup | ||
* 4% - Essential developers (1 year cliff, 4 year vesting thereafter, granted after launch traction) | * 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 | * 35% - All bonded / unbonded Luna, minus TFL at “Pre-attack” snapshot | ||
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* 10% - Luna holders (staking derivatives included) at the “Launch” snapshot - 10% unlocked at genesis, 90% vested over 2 years 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 | * 25% - UST holders at the “Launch” snapshot - 10% unlocked at genesis, rest vested over 2 years thereafter | ||
</blockquote> | </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 == | == Chainlink Oracle failure == | ||
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== 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> | 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> | |||
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> | 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. 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> | 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> | 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 | 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 | 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> | * 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> | * 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> | * 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> | *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 | *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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