Terra (LUNA) - What Caused the Collapse?
Terra (LUNA) - What Has Happened?
After the LUNA crash, the indexes of the Fear, Uncertainty, and Doubt (FUD) dropped which indicates that investors are extremely worried about the situation in the cryptocurrency market.
It is not surprising after the crash of one of the most impactful projects in crypto-space. Why did the Terra (LUNA) project crash though? Why did the crash pull the BTC price down? And whether all stablecoins shall be feared now? We have analyzed different opinions and made some conclusions.
LUNA Crash - a Scam, an Error or the Result of an Attack?
Many specialists still insist that the Luna crash was connected with the fact that the project itself was nothing more but a carefully planned Ponzi scam. The coin value was pumped, and when it reached a certain value, the project owners took their profit and dumped Luna by making it collapse.
However, there are some details that contradict this opinion:
- The project was successful and used to bring its founders more money than the crash would have brought.
- The project founders spent all the reserves to save the Terra (LUNA) project which leads us to think that they were not even thinking about scamming their followers.
- Even now, when the Terra blockchain is halted, Do Kwon is trying to find a solution and keep the community.
If LUNA was a scam, Do Kwon and other project founders would have disappeared with users’ funds already but they didn’t. Therefore, we can conclude that Luna can hardly be a Ponzi scheme. Most likely, the project either crashed because of some error in the algorithm (UST is not backed up with any asset, it is an algorithmic stablecoin), or it fell victim to an attack.
An Error in the Algorithm?
When the first UST depeg from the USD was observed, the coin recovered rather rapidly. Therefore, the algorithm that was used to keep the UST value stable, even though failed to deliver a consistent result for a while, worked finely in the end.
When the second depeg happened, and the UST value started dropping, the algorithm was not able to manage the pressure. Even when Terra Labs sold all the reserves in BTC, it did not help to save the situation. Why did it happen then? But before we analyze the data, some background information might be needed to understand better how the attack was performed.
George Soros
This person is well-known in the world of finance. He is an American billionaire, and he was the one who performed an attack on the Bank of England by making the GBP crash. This attack brought him more than $1bln, and since then, such attacks got his name.
In 1990, Great Britain joined the European Monetary System. The British Pound was highly overrated at that time, and it helped the country to buy imported goods at very beneficial prices. But on the other hand, companies that used to export goods from the country suffered. Combined, these factors led to the recession in the country.
The Soros Attack
At this moment, George Soros enters the game.
He decides to force the devaluation of the GBP. To do so, he takes short positions for GBP. To make the effect more powerful, he persuades the major investment banks such as JP Morgan, the Bank of America, etc. that the British Pound is going to collapse. It causes panic among investors, and they start selling the GBP which leads to the currency price plunge.
Great Britain uses a part of its reserves in foreign currency to buy back GBP and keep its value stable but it doesn’t help because there are not enough reserves to stabilize the situation.
As a result of the attack, GBP lost 15% of its value, and George Soros was left with more than $1bln in profit.
Now, let’s see what connection the Soros attack has with the Luna crash.
Did Luna Fall a Victim to a Soros Type Attack?
As you know, Luna is a coin that is supposed to absorb the market volatility and keep UST stable. The liquidity is kept in the Curve, a liquidity pool created on the Ethereum blockchain. As long as the pool is stable, the situation is stable, too. But what if the pool is destabilized? What happens if somebody performs an attack on UST just in the way George Soros did it with GBP?
Let’s have a look at some analytical data.
Here, you can see the balance proportion of stablecoins in the Curve pool:
Up to some point, the situation is pretty balanced:
But then, something happens: the UST amount in the pool grows drastically:
It looks like somebody injected a significant amount of UST into the pool to destabilize the situation and make the UST price plunge. And indeed, if you have a look at the data provided by CoinMarketCap, you will see that this is the time when the first UST depeg happened:
But the situation is still under the control of Terra Labs. The peg is recovered. But this move served the attacker in two ways:
- He saw that the injected amount of UST was sufficient to cause the stablecoin depeg.
- He made the investors worried.
In other words, the foundation for a full-scale attack was ready.
A new amount of UST is injected into Curve by causing the pool destabilization.
The Terra foundation sells its BTC reserves in an effort to stabilize the situation. A significant amount of UST is bought back, and the UST price grows:
But this move sends the BTC price down ($10bln BTC were sold which is enough to pull the coin price down). The Terra reserves are exhausted, and the attacker can buy BTC to further buy devalued UST and inject them into Curve.
It sends the UST price in a free fall. Considering that investors also started swapping UST to LUNA, which led to the LUNA liquidity drain, the situation went out of control.
Could it be prevented?
There were possible scenarios that could prevent the project crash.
1 - if Terra had sufficient reserves to manage the attack, the project could have been saved (a reserve of $10bln in BTC was not enough, so, you can imagine how well the attacker was prepared).
2 - If the Terra community hadn’t panicked and kept their UST, it would be more difficult for the attacker to complete the attack (even though there is no guarantee that it would fail).
Who Was the Attacker?
Even though the project founders are still accused of having drowned the project to scam investors and escape with funds, it doesn’t look reasonable to us. First of all, the company spent all its reserves in an effort to save the project. If LUNA was a scam, nobody would care to spend more than $10bln to save it.
Secondly, the attacker was not confident of whether the UST can be depegged and what amount of the coins would be needed to cause the depeg. There was a try first, and when the coin depegged, a full-scale attack was performed. It makes us think that even though the attacker was well-prepared, and he analyzed all the possible measures that can be taken, he was not confident in the success.
Finally, there are some speculations that a governmental institution might have performed the attack to make the serious competitor collapse. Considering that the attacker should have had resources that exceeded the resources of the Terra Labs (at least $10 bln in BTC plus other cryptocurrencies, including UST and LUNA), it can hardly be a physical person. So, it can be a competitor whether in the field of traditional finance or the field of crypto.
Bottom Line
As we could see, algorithmic stablecoins might not be as stable as the name implies. For now, one of the most powerful and promising projects in the crypto space crashed, and the recovery is very slow. This crash caused all cryptocurrencies to drop in value, and the market is again in the red. However, the technology of algorithmic stablecoins is promising and over time, it might change the world of finance.
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