LUNA’s Terror & the Massacre of May.
I’ll make this a recap of what has been a sobering market experience. Exams be damned.
The past week saw to the expulsion of ‘tourists’ in Crypto and DeFi, the deletion of LUNA’s multibillion market cap, and all-time records on the Fear indicator w.r.t the Crypto industry.
Let’s start with:
What the F*ck just happened?
A native token LUNA, housing a pretty vibrant ecosystem of blockchain infrastructure blew up, and is probably dead.
Cause of death?
No one knows yet, though there are some amazing stories pointing at:
- Citadel…yes Citadel (that enemy of Wall Street Bets /that hedge fund).
- BlackRock (for some stories, in conjunction with Citadel… word of mouth does that).
- Their founder, Do Kwon’s hubris. Obvious this allegation would settle, former holders are angry as hell, and decisions taken under him lead LUNA’s vulnerability at the very least.
I don’t find this story funny, it’s wrecked lives and destroyed a great project, but it is objectively entertaining.
LUNA and UST, what are they?
LUNA was the lovechild of alt-coin buyers, and for good reason.
The core idea was revolutionary and cunning.
As a consequence of LUNA and UST, Terra made a dollar equivalent accessible to everyone — irrespective of nationality, sanctions or domestic economic turmoil.
They could, as a company, be immune to regulatory pressure — since they held $0 in assets.
Money algorithmically escapes monopoly control.
So, how did Terra seek to achieve this?
They built a top 10 market-cap and vibrant L1 ecosystem with the native token LUNA. This token would have the further use case as collateral for a stable coin pegged to the dollar, UST.
Then the mathematical magic takes place:
A) If the price of 1 UST= 0.95 USD, you can send 1 UST to Terra Smart Contract to get 1 USD from LUNA. This reduces the supply of TerraSDR to increase its value to parity with the USD.
B) And as expected, when the price of 1 UST= 1.1 USD, you can send 1 USD to Terra’s smart contract to receive 1.1 UST. This increases the supply of UST to dilute its value back to parity with USD.
By redesigning a dynamic peg to the dollar as an arbitrage opportunity, backed by Luna and its ecosystem, Terra could keep stable-coin prices pegged to the dollar without physically holding those assets in reserve.
It’s fantastic engineering, and as always it was ruined by a ponzi element.
The Ponzi Element.
UST needed adoption to work. If there were not enough arbritragers to fix the peg, it would slip, holders would panic at their stable-coin not being stable, and pile on selling pressure.
Hence, it promised 20% APY to staked coins on a protocol called Anchor.
So here came the First Problem.
If they reduced staking rewards a massive amount of holders may also pile on selling pressure, breaking the peg.
The problem was recognised by Do Kwon, who addressed it by purchasing BTC ready to be used to stabilise the peg, if it was caught slipping too much.
The Second Problem.
Unfortunately, he tweeted this… along with the exact amount held in BTC. Do Kwon effectively choreographed the exact amount of ammunition in dollars needed to depeg UST.
BTC dumped following a macro markets sell-off, Do Kwon’s BTC position lost millions.
Luna followed the dump harder (as alt-coins do), and smart money and a general sell off in UST and LUNA followed.
Panic settled in as short interest in BTC & UST whittled away Do Kwon’s ability to defend the peg and UST eventually crashed.
Do Kwon inflated the supply of Luna by burning UST, in a frantic attempt to rebalance the peg again, yet this did nothing but devalue Luna further as trust dissipated in the network.
So…was there a Trigger Trigger?
Here are some of my favourite theories about what caused the collapse (outside of a bear market).
The “F*ck you Wallstreet” theory:
What makes this interesting is the speed of which US regulators sought to push forward with stable coin regulation discussions.
I’ll be honest, seeing Yellen’s face right after this happened upset me.
Citadel has issued a public statement denying ever taking a loan in BTC, claiming not to engage in such practices.
Do Kwon’s Hubris
Apparently this isn't Do Kwon’s first Stable coin project, the last one ending in failure.
His behaviour during the period of time when Tether’s sustainability was called into question.
Rumours are circulating that the BTC was used to facilitate Luna whales exiting UST at 1 dollar. If true CZ probably is one of them (CEO of Binance).
- I think the meta days of DeFi yield and staking yields are over.
- I think Stable coins based in the US are at serious risk. The regulatory environment is toxic, and vocally wants to go further than constructive.
- Swiss Franc? Singaporean Dollar? I think USDC and a neutral currency will take their place as the most used stables.
- Oh and algorithmic stable-coins probably won’t be here for a while.
Anyways here’s a poem!
With Crypto pimp-slapped on the week,
And slowly stabbed, by Yellen the sneak.
Alone & floor’d,
She silently roared!
When knells replied,
She looked up and she cried.
I ask of you,
Young daring lads,
Equipped with the strategies of man.
What better time — than a blackened moon,
To extend an opportunistic hand.
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