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last week we saw what was once believed to be one of the most promising crypto projects collapse resulting in tens of
billions of dollars of losses for individuals and institutions alike i am
of course talking about terror and as someone who held both luna and ust as
part of their portfolio i wanted to wait until more facts came out before commenting on what the hell happened
today i’m going to examine exactly what happened to terra tell you who could have been behind its crash and what
comes next for this controversial crypto project
before i flog a dead horse there are some terms and conditions i must enforce nothing in this video is financial
advice and doing your own research is the only thing i endorse you can use this video as part of your research of
course but for all the rest a licensed financial advisor is your best recourse
now whether you be a friend or foe i’d like to welcome you all to the coin bureau my name is guy if you didn’t
already know and i make high quality content about crypto coins tokens news reviews and other
topics that will turn you into a crypto pro if you want to go with my flow subscribe
to the channel and ping that notification bell down below okay that’s it for the intro it’s time to find out
what really caused terror to implode let’s take it from the top so that we’re
all on the same page terra was and i suppose technically still is a crypto project founded in
early 2018 by ivy league educated economist daniel shin an ivy league
educated computer scientist doe quan terra was built by terraform labs or tfl
a south korean software company which was incubated by the terror alliance a group of 15 asian e-commerce giants
note that terraform labs is based in singapore do kwan has served as the ceo of
terraform labs since its inception and daniel shin left terraform labs in early
2020 to become the ceo of the chai corporation a payments app that
leverages terror terra’s development is coordinated by the luna foundation guard or lfg a
singaporean non-profit that was incorporated in january this year note that all these details will be
relevant later so listen close the luna foundation guards governing council consists of seven individuals
including do kwan as well as representatives from prominent crypto vcs like jump crypto and delphi digital
and even finance labs now terra raised roughly 47 million
dollars across three icos in 2018 and has since raised tens of millions more from prominent crypto vcs namely galaxy
digital which invested 25 million dollars in terra in early 2021.
terra’s main net went live in april 2019 and its blockchain was built using the cosmos sdk
this means tera can process thousands of transactions per second while remaining secure though it is quite centralized
with just 130 validators note that terror’s validators are also
the price oracles for terror now terra is or rather was an ecosystem
of decentralized stable coins and its purpose was to power the next generation of payments with its various
decentralized digital currencies and the various decentralized applications that were being built on the terra blockchain
luna is terra’s native cryptocurrency coin and it’s used for staking on the terra blockchain to pay for transaction
fees on the terra blockchain and to table and vote on governance proposals for the terror blockchain
luna is also used to ensure tera’s various decentralized stablecoins remain pegged to their respective fiat
currencies now it does this using a novel mint and burn mechanism plus free market
arbitrage ust was or rather is terra’s largest decentralized stablecoin and it is or
rather was pegged to the us dollar like everyone else i’ll use ust to
explain exactly how terra’s mint and burn mechanism works don’t worry i’ll keep it super simple
on terra one dollars worth of luna can always be burned to mint one ust and one
ust can always be burned to mint one dollars worth of luna now suppose ust is trading at 1.50 or 50
percent above its one dollar peg if you hold luna you could burn one
dollars worth of luna to mint one and a half ust and then sell that newly minted
ust for say another stable coin the result is an instant 50 profit and
the increase in ust supply combined with the cell pressure from you and other
lunar holders who are minting and selling ust eventually brings ust back
down to its one dollar peg obviously the prospect of these instant profits creates buying pressure for luna
as well logically the same process applies in the other direction for example if ust
is trading at just 50 cents or 50 percent below its peg as a ust holder
you could burn one ust and essentially mint twice the dollar amount in luna and
make a 2x profit assuming you immediately sell that luna for something else
this reduction in usd’s supply combined with the buying pressure for ust from
traders who want to make a quick profit eventually brings ust’s peg back up to
one dollar now this is why ust is referred to as an algorithmic stablecoin and though this
process of maintaining a peg sounds robust on paper in practice a de-pegging
of ust to the downside runs the risk of something called a death spiral
as i just mentioned when ust drops below its peg there’s a huge incentive for traders to come in and buy that ust burn
it to mint luna and sell that luna for an instant profit i’ll repeat that in order to realize this profit that newly
minted luna must be immediately sold now when the crypto market is on the
rise this process isn’t necessarily a problem because there’s lots of speculative demand for luna and that
means any selling by ust arbitrage traders is unlikely to affect its price
if at all when the crypto market is on the decline however this process does become a
problem because there’s not much speculative demand for luna and that means its price is going down while it’s
being aggressively sold by ust holders this makes its price fall even further
and causes panic among ust holders and this is the short explanation of what
happened to terror as you will soon see however there were a lot more moving
parts beneath the surface and the first part we need to examine is something called seniorage
on terra minting ust by burning luna costs a small fee in luna called
for a long time seniority fees went to terra’s community treasury
after a while the size of terrace community treasury had grown so large that the terror community voted to burn
all seniority fees as part of the columbus 5 upgrade last september
the terror community subsequently voted to convert the 89 million luna in the treasury to mint around 4.5 billion ust
in november so yes it was large to say the least in the months that followed the terror
community approved various proposals to bridge ust to just about every major smart contract cryptocurrency as part of
the project’s mission to make ust the most accessible stable coin in the crypto markets
when ust bridged to other blockchains some kind of liquidity mining rewards were almost always involved
put differently anyone who used ust in d5 protocols on other cryptocurrency
blockchains would earn additional cryptocurrency be it luna ust or some
other coin or token naturally these additional rewards created a lot of demand for ust
this increased demand for ust would push it ever so slightly above its one dollar peg and ust being above its peg would
incentivize market participants to buy and burn luna to mint ust for a small profit this not only caused ust’s market
cap to increase exponentially but it also caused luna’s price to increase
exponentially that’s because of basic economics luna’s supply was gradually being reduced as
people burned luna to mint ust for a small profit with demand for luna simultaneously
increasing while the number of lunar in circulation fell this caused its price to rise rapidly
this dynamic is why some claim that terror is a ponzi but if we’re being honest a similar dynamic exists with
just about every other asset on the planet for that matter heck even stocks only continue to rise because of
increasing demand over time i digress at its peak in early april luna hit a
high of 120 dollars and tera surpassed solana to become the sixth largest cryptocurrency by market cap
meanwhile ust’s market cap and circulating supply was just shy of 19 billion making it the third largest
stablecoin after tethers usdt and circles usdc
ust was also listed on all of the most reputable crypto exchanges including
coinbase binance ftx and kucoin with many crypto and ust trading pairs so not
just with other stable coins although lots of demand for ust was coming from all of the d5 protocols
offering liquidity rewards the overwhelming majority of demand for ust was coming from a single d5 protocol on
the terra blockchain called the anchor protocol which held almost 80 percent of all the ust in circulation
this brings me to the second moving part beneath the surface which is of course anchor protocol
as many of you will know anchor protocol was famous for offering a stable interest rate of 20 percent per year on
ust this suspiciously high rate led many people to accuse anchor protocol of
being a ponzi but this also doesn’t seem to be the case when you consider how
exactly anchor protocol works and i’ll use a simple analogy to explain
imagine there’s a bank that’s offering a five percent annual interest rate on savings the good old days if you will
now let’s say some rich bloke comes along and deposits 100 billion dollars
into this bank quick maths tells you that this rich fellow will rake in five billion dollars
per year from his massive cash pile now let’s say that some poor bloke comes
along and deposits 100 into the same bank quick maths tells you that this poor fellow will make just five dollars
per year from his tiny cash pile but the bank has a special deal for him
for a limited time we will give you an annual interest rate of 20
how is the bank going to give this poor bloke this interest rate you ask easy just take 20 from the 5 billion of
interest coming from the rich blokes massive cash pile and add it to the poor bloke’s tiny cash pile billy big bags
won’t even notice now jokes aside because the interest being earned by the rich blokes cash
pile is so massive the bank can afford to give a 20 interest rate to literally
thousands if not hundreds of thousands of poor blokes and potentially secure thousands if not hundreds of thousands
of new customers there’s only one thing the bank must do and that’s to convince the rich bloke to
let it redirect the five billion dollars of annual interest on his massive cash pile to all the small cash piles of the
poor blokes how is the bank going to convince the rich bloke to give up his annual
interest you may ask easy just offer him shares in the bank itself
that will give him control of how the bank operates and promise to use a portion of all the interest being
generated by the bank to purchase more shares so their prices stay high
now believe it or not but this is almost exactly how anchor protocol works or rather worked on anchor protocol the
rich folk would deposit large amounts of staked luna from terror staked atom from
cosmos staked soul from solana staked avax from avalanche and even staked eth
from ethereum the annual staking rewards for these proof-of-stake cryptocurrencies was or
rather is 5 or more all these staking rewards from the rich folks would get
converted into ust by the anchor protocol and then this ust would be given to the poor folks who were
depositing ust to earn 20 per year if the staking rewards being earned by
all proof-of-stake cryptocurrencies provided by the rich folks exceeded the amount needed to provide poor folks with
a 20 yield on ust these additional staking rewards would again be converted
into ust and deposited into the anchor protocol’s yield reserves which would be
used to keep paying the poor folks when there aren’t enough rich folks around
in return for providing proof of stake cryptocurrencies the rich folks would get anchor protocols anc token which is
used for governance and a portion of anchor protocol’s yield reserves would be used to buy anc to ensure that its
price increased along with the popularity of the protocol as with terror itself anchor protocol worked
much better on paper than it did in practice because in practice there are many more poor folks than there are rich
folks in other words the staking rewards coming from the proof-of-stake cryptocurrencies provided by the rich
folks was not nearly enough to continue paying a 20 interest rate on ust for all
the poor folks and as a result the yield reserves were being drained rather than
filled now to be fair this is something that the anchor protocol team and community
were aware of and it’s why they were in the process of reducing the protocol’s 20 interest rate to something more
sustainable in the interim anchor protocol’s yield reserves were being replenished with ust
coming from the entities behind terror and this ties into the third moving part
beneath the surface the lunar foundation guard as i mentioned earlier the luna
foundation guard or lfg is the singaporean non-profit that coordinates terra’s development however the lfg
plays another more important role and that’s to ensure ust’s peg remains stable at all costs as many of you will
know the lfg is famous for buying up billions of dollars of btc which was
going to be used to protect ust’s peg what many of you might not know is the
back story to how this btc treasury came to be prior to the events of last week ust
held its peg quite well save for three occasions the first was at the end of december
2020 when ust fell sharply below its peg for about a day now i actually couldn’t find the exact
cause of this but if you know please drop a comment below anyways the second time ust lost its peg
was during the crypto crash last may when ust fell significantly below its peg for more than a week
in an interview from last october terra co-founder do kwan explained that it was last may’s crash that really made the
terror team start to think about how they could protect ust’s peg and they settled on btc as the ideal backing for
ust during times of volatility however it was ust’s third major
de-pegging event that really kicked the terror team in the keister and that was when ust fell slightly below its peg in
january now this d-pegging was reportedly caused by a d5 protocol called abracadabra
which makes it possible to mint another decentralized stablecoin called magic internet money or mim using
interest-bearing tokens as collateral as you might have guessed ust was one of
the tokens that could be deposited into abracadabra to mint mim specifically a
ust which is an interest bearing token given to ust holders as a sort of receipt for their ust when they deposit
said ust into the anchor protocol on abracadabra some d5 degens came up
with a clever strategy called the degen box which is where you deposit aust into
abracadabra to mint mim then use the mim to buy ust
deposit ust into anchor protocol to get more aust deposit that aust into
abracadabra and so on until you have lots of yield now it doesn’t take a d5 expert to
realize that this defy strategy is extremely risky because if mim or aust
deviates from its peg by even just a couple of percentage points the entire scheme could collapse very quickly and
in terra’s case this had the potential to do serious damage to ust and
luna as it so happens it was discovered that one of the people working closely with the developer behind abracadabra
was the co-founder of quadriga cx the infamous canadian cryptocurrency exchange which collapsed after its other
co-founder died while on holiday in india or so the story goes
this shocking revelation spooked holders of the coins and tokens associated with abracadabra and this is ultimately what
caused ust to fall slightly below its one dollar peg realizing the exponential risks
associated with having ust on so many chains and in so many d5 protocols the
recently incorporated lfg moved forward with the plan to use btc to protect
ust’s peg this relates to the fourth moving part beneath the surface the lfg’s btc
accumulation about a month after the lfg was established it started raising the
capital required to purchase boatloads of btc starting with a one billion
dollar raise from prominent crypto vcs including jump crypto and three arrows capital which was financed through
over-the-counter sales of lfg’s lunar holdings the plan was straightforward buy up
enough btc to back 20 percent of ust’s circulating supply and then use tera’s
aforementioned senior ridge fees to automatically purchase additional btc every time someone burns luna to mint
ust recall that seniority fees are currently burned
now given ust’s circulating supply at the time backing 20 of it with btc would
require just over 3 billion worth of btc with only 1 billion raised and much of
it spent the lfg needed some additional capital to continue its btc accumulation
in early march terra co-founder do kwan announced that terraform labs had gifted
1.2 billion dollars worth of luna to the lfg which would be converting it to ust
and using said ust to continue buying btc a few days later doe also announced that
terra was aiming to accumulate 10 billion of btc to protect ust’s peg with
3 billion being accumulated by the lfg and the remaining seven billion being accumulated over time via seniority fees
shortly after that jump crypto posted a plan for how exactly btc could be used to protect ust’s peg to terra’s
governance forum and the short explanation is that the lfg would deposit all its btc into a non-custodial
reserve pool where anyone could redeem ust for btc the same way they do with
luna the assumption there is that if ust were to drop significantly below its peg
rational market participants would opt to swap their one ust for one dollars worth of btc rather than one dollars
worth of luna this would take the cell pressure off luna and prevent the death spiral
scenario i was talking about earlier jump crypto’s plan was actually extremely detailed i’ll leave it in the
description if you’re interested anyhow in early april binance added
support for the anchor protocol making it possible for its 30 million users to earn high stable yields on ust
note that i’m just mentioning this to underscore just how integrated terra was with the entire crypto ecosystem
terraform labs and the luna foundation guard also purchased 200 million dollars worth of avalanches avacs as part of an
ongoing plan to add other cryptocurrencies to terror’s stability reserves for ust
dokwan had earlier mentioned that their plan was to eventually start accumulating the cryptocurrencies that
belong to the smart contract blockchains ust is available on again this will all be relevant in just
a moment in mid-april terraform labs gifted yet another 900 million dollars worth of
luna to the lfg to sell for more btc all the while the lfg was giving
frequent updates about its btc buys which would happen in waves of around 100 million dollars at a time
the lfg also made all its crypto wallet addresses public for everyone to see the accumulation in real time
the lfg achieved its target of backing 20 of usd circulating supply on thursday
may the 5th with a 1.5 billion btc buy financed through the sale of luna to
three arrows capital and genesis global trading a crypto otc broker and subsidiary of digital currency group
and then everything went to s-h-i-t
terra’s implosion arguably began on saturday the 7th of may and i’ll quickly note that the following order of events
has been confirmed to one of the researchers here at the coin bureau by a high profile member of the terror
community who shall not be named i’ll also highlight events where speculation is involved
on saturday night the terror team withdrew a massive amount of ust from a
trading pool on curve finance for context curve finance is a decentralized exchange for stable coins
and the terror team withdrew all that ust in preparation for something called
the four pool which i won’t get into here all you need to know is that the moment the terror team withdrew this ust
an unknown whale sold around 85 million ust for 85 million usdc on curve finance
and this pushed ust slightly below its peg there is speculation that another 200
million dollars of ust was simultaneously sold on binance and though lots of well-respected folks in
the crypto space swear that this happened it cannot be confirmed
regardless of where the cell pressure was coming from it was enough to push ust slightly below its peg
now because the crypto market had already been crashing in the days prior risk-averse individuals and institutions
with exposure to ust immediately started selling out of safety concerns and this
isn’t speculation in a recent interview with digital asset news celsius ceo alex mizinski said they
pulled all their and their users assets out of the anchor protocol as soon as
ust fell slightly below its peg and this was almost certainly the case with similar crypto apps that had exposure to
ust and the anchor protocol as you can see around 9 billion of the
14 billion ust on anchor protocol was withdrawn within the first 48 hours of
ust falling slightly below its peg this mass exodus from the anchor
protocol created intense cell pressure for ust as everyone exchanged it for
other stablecoins and this pushed ust significantly below its peg
when that happened various market participants started burning ust to mint luna for a quick profit which of course
requires selling luna right away to realize especially since luna’s price
had already been crashing along with the rest of the crypto market this cell pressure on luna as well as
the sudden increase in its circulating supply crashed its price even further and the moment luna’s market cap fell
below ust’s market cap luna officially entered the death spiral with more luna
being minted while its price was reduced to ashes this is simply because ust is
fundamentally a representation of the potential cell pressure on luna and it
appears that many lunar and ust holders took this realization to heart if ust’s
market cap is larger than lunars then it can’t absorb the cell pressure from ust
and that means it’s going to zero with luna’s price in freefall the
integrity of the terror blockchain itself was under threat as an attacker could manipulate the governance
proposals that people were trying to pass to stop the bleeding a low lunar price also made it easy for
a malicious actor to become a validator and manipulate transactions left with no other option tera’s
validators agreed to halt the chain for a while to try and buy some time upon restarting the chain the chaos
continued so terra’s validators halted the chain again before restarting it for a second time but with terra’s mint and
burn mechanism for stable coins disabled all the while terra’s luna foundation
guard was aggressively selling btc on the spot market with the help of multiple market makers on multiple
exchanges and the lfg revealed in a recent twitter thread that it had basically emptied the clip it spent over
80 000 btc to try and restore ust’s peg
on-chain analysis done by glass node and elliptic seems to confirm the lfg’s
claims and you can find both of those reports in the description now there is speculation that the same
entity that dumped ust on curve finance and supposedly on binance also opened a
short position on btc knowing that the lfg would be dumping its btc on the open
market thereby crashing btc’s price there are again many prominent crypto
personalities who insist that this is what happened and some have even gone as far as to say that the attacker even
used the profits from shorting btc to continue attacking terror through its mint and burn mechanism now
unfortunately none of this can be confirmed by friday the 13th of may both luna and
ust had flatlined dealing a 40 billion blow to luna and ust holders and tens of
billions of more dollars in damage to the individuals institutions d5 protocols and smart contract
cryptocurrencies that had exposure to terror’s ecosystem which was almost all
of them and yes one of those individuals was me
so who is to blame for tara’s collapse well i’ll start by saying that nobody
currently knows who’s behind it all and maybe we’ll never know all we have right now is speculation
based on what are likely just coincidences but all signs seem to point
to wall street and here’s why almost every single individual and institution in cryptocurrency had
exposure to terror in some way shape or form vcs were heavily and i mean heavily
invested in this project and they genuinely believed in its potential like
so many of us did and some still do as a quick side note i remember at the coin
bureau conference a couple of weeks ago we asked the crowd how many people were using anchor protocol and almost
everyone raised their hand literally hundreds of people it’s just one of many examples of how
widespread the adoption of terror really was if you accept this premise the only
place this potential perpetrator could have come from is traditional finance because i don’t imagine anyone involved
in crypto would shoot themselves much less their crypto partners and clients in the foot by killing terror just to
make a few billion bucks i also don’t imagine anyone involved in crypto would want to draw the attention
of regulators by destroying a decentralized stablecoin as far as i know the only people who want aggressive
crypto regulation work in or work closely with entities in traditional
finance this is where the coincidences come in and the first one is that the federal
reserve mentioned the risks of stablecoin runs in its financial stability report which was released on
the monday after terror began collapsing if you ask me this really was just a
coincidence the second coincidence is much harder to explain away however and that’s that
treasury secretary janet yellen mentioned terra’s collapse in her testimony to u.s politicians on the
wednesday now i find it hard to believe that word of tara’s d-pegging had reached her so
quickly unless someone she knew was following terra’s dynamics closely but still probably just another coincidence
the third coincidence is more like circumstantial evidence and that’s the fact that tethers usdt stablecoin also
briefly fell below its peg and that this is something janet also mentioned in her testimony on the thursday
this can be easily explained away by the fears that the regulatory crackdown on stable coins will likely affect tether
as it operates outside of the united states and hasn’t exactly been all that transparent about the reserves backing
usdt for what it’s worth tether has reportedly redeemed over 9 billion usdt
over the last week or so with no issues interestingly the market cap of circles
usdc increased by about 4 billion over the same period and busds by 2 billion a
flight to safety i suppose the fourth coincidence is closer to concrete evidence and that’s the timing
of this supposed attack the fact that someone knew exactly when the terror team would be pulling ust out
of curve finance seems to be the strongest evidence that this was an attack from someone somewhere as this
information was not publicly known the events that unfolded afterwards could have been nothing more than
various market participants taking advantage of terra’s downfall be they from wall street or main street
still there’s no denying that this dented the crypto industry and the legacy financial system especially the
us dollar itself can and likely will do everything within its power to ensure
that it’s not replaced by crypto or anything else consider for a moment that terror was
building a decentralized stable coin backed by digital gold that might just
be the greatest middle finger to the financial system anyone can raise
now to wrap things up i want to talk a bit about terra’s future which is currently uncertain the latest news is
that terra is probably going to fork with the old terror chain being known as terra classic and the new terror chain
retaining the original name but with no algorithmic stable coins terra co-founder do kwan is behind this
recovery plan and he noted on twitter that a snapshot of terra’s current blockchain will be taken next friday the
27th of may and those with luna and ust in their wallet at that time will
receive a portion of luna’s new supply if i understand correctly the initial
supply of new luna will be the same as the initial supply of old luna which is 1 billion and it will be distributed as
follows 25 to the community pool 35 to holders of luna prior to terrace
collapse 10 to the holders of aust prior to terrorist collapse and you’ll recall
aust is the token receipt you get when you deposit ust into the anchor protocol
10 to holders of luna after terra’s collapse and 20 to ust holders after terra’s
collapse i’ll leave a link to the details in the description that describe the exact vesting schedule and all of that fun
stuff dokwan’s terrafork proposal is currently being voted on and so far it looks like
it’s likely to pass even if it doesn’t pass a terror fork of some kind is the most likely outcome and
that’s for one simple reason exit liquidity as you can imagine everyone who was close to terror when it exploded
is desperate to get their money back and forking terra’s blockchain is probably their best bet to that end even if it’s
not ideal by any stretch not only that but our source in the terra community told us that most of the
projects building on terror were actually staking their treasuries on the anchor protocol to get more money for
development this means that most of terra’s projects are unlikely to go anywhere for the time
being simply because they are waiting in line to get their scraps from the new terra blockchain too
if you’re wondering why most of terra’s projects don’t start building on other blockchains in the interim the answer is
apparently juan himself doe was famous for being bombastic to put it mildly he frequently ragged on
other crypto projects he saw as competitors and routinely shot down terrorist critics even when they clearly
had a point while doe’s powerful personality made terror a powerful project it also made
him many enemies and it’s even possible that one of them was behind the attack on terror’s curve finance migration
moreover the consensus in the terror community seems to be that dokwan’s godlike position in the project’s
ecosystem clouded his judgment on more than one occasion and there’s certainly a discussion to be had there
never mind that whole thing about his involvement in basis cash the bigger problem is doe’s continued
affiliation with terror specifically his involvement in the creation of terror’s new blockchain and the fact that it’s
guaranteed to alienate vcs angel investors and rational retail investors
who aren’t fans of dough and that list seems to be growing by the day
the real tragedy is that it looks like terrors developers projects and communities will have to keep following
his footsteps regardless of where they lead because it’s the only hope they really have at getting some of their
money back if and when they do i suspect that the cosmos ecosystem will see an explosion
in growth and development because at the end of the day there’s no denying that terror had some of the best developers
and easily one of the best communities in crypto and they will succeed where
terror failed and that’s all for today’s video about what happened to terror if you feel
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in the meantime you can check out coin bureau eclipse for more from me or tune into the coin bureau podcast to hear
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also note that there’s about two weeks left for you to try your luck at that one whole bitcoin giveaway we have going
on you can find all the details about that using the link in the description
my friends thank you all so much for your time this has all been exhausting hasn’t it don’t
worry it will get better crypto will recover and we’ll all be there when the sunshine returns
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