Bringing LUNA down a peg
In the last few days, the two main stablecoins from the crypto project Terra dropped about 80 per cent, flushing the rest of the crypto market including the strongest assets like Bitcoin and Ethereum, which lost 17% and 23% of value correspondingly in latest days.
A stablecoin called TerraUSD, or UST, dropped to a low as $0.26, while its sister currency Luna collapsed to nearly $0.
This crash caused investors losses valued at billions of dollars and threw back other cryptocurrencies. This has created fear and panic among investors, raising legitimate questions about the regulation of digital assets. It has also undermined crypto developers’ claims they could create a new form of finance not spoiled by the destabilizing bank runs that every now and then happen in traditional finance. Why did it lose 99% of its value all of a sudden? Is the digital asset still favorable?
Let’s get a grip of the facts and try to understand what happened and why.
Understanding why UST collapsed this past week means understanding the Anchor lending protocol — a kind of crypto bank created by developers at Mr. Kwon’s firm, Terraform Labs. One of the earliest signs that things were going wrong for the stablecoin came when UST deposits on Anchor started dropping over the weekend of May 7–8 and plummeted on May 9. Many traders consider a series of large withdrawals from Anchor Protocol to be the catalyst for the drop. Before UST started its decline late on May 7, 75% of UST’s entire circulating supply were locked up in Anchor. That’s $14 billion of UST out of a total circulating supply of $18 billion. With so much UST locked up in Anchor, it became clear that most investors were buying the stablecoin with the primary goal to receive those offered yields of “up to 20% on the year to users who deposit their UST on the platform”. UST deposits dropped dramatically starting from May, 7 from $14 billion to as low as $1.6 billion. Big transactions over that May weekend knocked TerraUSD from its $1 value. So much money draining from UST’s logical center signaled a massive loss in confidence in the entire Terra protocol.
A reserve fund of about $3 billion in bitcoin and other cryptocurrency resources, owned by the Luna Foundation Guard, a nonprofit co-founded by Mr. Kwon, had been emptied, striving to maintain the peg for TerraUSD.
The Luna Foundation Guard released a statement on Monday documenting that it has almost entirely depleted its BTC reserves from around 80,000 bitcoins to 313. The remaining value, which mostly is made of the crashed UST and LUNA tokens, will most probably be used to compensate investors.
Zhao, the CEO of Binance, along with other notable crypto figures like Ethereum founder Vitalik Buterin and Justin Sun, the creator of USDD stablecoin, supported a proposal by a Twitter user to refund 100% of funds to the poorest of wallets who lost money from the UST crash.
Even as Do Kwon announced on Twitter a UST rescue plan was in the works, market confidence in the project appeared to fall to all-time lows, raising questions around the possibility for the “stable” coin to ever regain its stability. It is known that some Reddit users have filed a police report in Singapore against Do Kwon on behalf of $LUNA and $UST investors.