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Difference between revisions of "LUNA Collapse in May 2022"
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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 with LUNA as part of the [[Terra]] ecosystem which is ran by Do Kwon. | ||
The collapse wiped over $40b in value | 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 a stable coin which can be minted by burning LUNA. Its 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. | UST is a stable coin which can be minted by burning LUNA. Its 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 billions 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 == | == 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. | 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> | 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. | ||
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> | |||
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> | |||
The efforts are ongoing. | |||
== Aftermath == | == Aftermath == | ||
Crypto fund Arca whose main holding was UST incurred significant losses and emailed investors to let them know they believed UST would regain its peg.<ref>https://www.coindesk.com/business/2022/05/11/crypto-fund-arca-doubled-down-on-ust-amid-stablecoins-collapse/</ref> | Crypto fund Arca whose main holding was UST incurred significant losses and emailed investors to let them know they believed UST would regain its peg.<ref>https://www.coindesk.com/business/2022/05/11/crypto-fund-arca-doubled-down-on-ust-amid-stablecoins-collapse/</ref> | ||
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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> | ||
Terra TVL went from $35b to less than $3b in five days<ref>https://defillama.com/chain/Terra</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%. | 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. 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> | ||