Terra LUNA UST Collapse The Inside Story

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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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