ViaBTC Capital|The Collapse of LUNA

Timeline of the Collapse:

-In the early morning of May 8, to put together for the 4Crv Pool, Luna Foundation Guard (LFG), a Singapore-based non-profit that maintains the Terra community, eliminated $150 million value of UST from the UST-3Crv Pool. At this time, the TVL of the pool was round $700 million. In different phrases, it price solely about $300 million to drain this pool.

– To maintain the steadiness of liquidity within the UST-3Crv Pool, LFG eliminated one other $100 million value of UST from the pool.

– On the night of May 8, WhaleTrades, a whale alert account on Twitter, started to “ring alarm bells” frantically: there was a tweet of promoting tens of millions of {dollars}’ value of UST each hour.

– On the morning of May 10, Jump Trading and LFG might have sensed the issue and stopped promoting their Bitcoin holdings to present assist for UST’s peg, letting issues drift. As a end result, UST plummeted all the way in which to $0.6.

– On May 11, UST appeared to be shorted by Soros-style brief sellers, and has plummeted to a minimal of $0.2998 (supply: CMC) after rounds of underselling.

It was a terrifying day on May 11: there appeared to be brief sellers intentionally shorting UST and LUNA:

– While liquidity is being withdrawn from the UST-3Crv Pool as reserves for the 4Crv Pool, a single pockets dumped $350 million value of UST on Curve, making UST lose its peg to the US greenback. In response, LFG bought BTC to maintain the peg, after which the brief vendor dumped the remaining UST on Binance.

– UST was critically depegged, adopted by a run on UST. LFG then got here to the rescue with a plan to lend massive quantities of BTC, solely to trigger a nosedive in BTC. Since new LUNA is minted by burning UST, the provision of LUNA has elevated as an alternative, leading to its hunch.

– The revenue from brief positions of BTC and LUNA of the brief vendor is estimated to exceed $1 billion, and the price, primarily the UST dumped, is estimated to be inside $200 million.

Impact on the LUNA Ecosystem

Considering the shut relationship between tasks within the Terra ecosystem and LUNA and UST in addition to the reinvestments and earnings of DeFi Legos, the UST depegging has dealt a heavy blow to each the LUNA-margined and UST-margined staking, DeFi, lending, margin, and different protocols and the costs. What’s worse, it even instantly triggered the liquidation of protocols, pushing LUNA and UST right into a secondary dying spiral.


1. Anchor

As a decentralized financial savings protocol constructed on the Terra ecosystem, Anchor boasts a secure APY of 20%, which is its most distinguished function.

Influenced by the UST depegging, Anchor’s APY rests at 18.9%, however its whole deposits plummeted to $3.99 billion from $14 billion final Friday, as advised by Anchor’s Dashboard.

As a complement to the Anchor and Terra ecosystems, Orion.Money is designed to facilitate the conversion of different stablecoins akin to USDT and DAI into UST for earnings on financial savings within the Anchor ecosystem. Specifically, traders stake ORION and luxuriate in appreciable returns with 10%, 15%, and 20% APYs. With the UST depegging, the stablecoin stakings on the Orion protocol have slumped by greater than 50%.


2. Mirror


The artificial belongings in Mirror are all minted with UST as the primary collateral to mirror varied monetary belongings akin to shares and ETFs. Therefore, the funding demand for any U.S. stock-based artificial belongings in Mirror will ultimately flip into the demand for UST, which creates an important utilization state of affairs for this stablecoin and offers worth for UST and LUNA.

The TVL of the Terra chain on Mirror fell from $600 million to $240 million, a drop of 60%.

3. Lido and node staking

Lido, the biggest liquidity staking protocol, began the Liquid Staking for Terra plan as early as final 12 months, releasing the LUNA staked by nodes within the Terra ecosystem. The LUNA staked on Lido additionally witnessed a drop of about 60% in addition to frantic underselling. As a end result, the TVL of Terra’s staking in Lido dropped by 80% on May 11 alone, with a seven-day drop of a staggering 91%.

On the opposite hand, node staking instantly impacts the verification and safety of the Terra community. For the time being, we haven’t noticed a big quantity of nodes fleeing. Considering the UST depegging, increasingly LUNA can be in circulation, pushing up the provision towards 1 billion.

4. Abracadabra

Abracadabra launched the Degenbox UST technique. Users deposit UST tokens into the cauldron so as to both borrow MIM or leverage their place, thereby significantly enhancing returns. As lengthy as UST stays at $1, this technique is mainly risk-free. However, as soon as UST is depegged, customers threat liquidations if their collateral devalues.

Currently, the Abracadabra protocol is shifting all UST from the UST technique on Terra again to Ethereum in response to present market circumstances. It pays extra consideration to liquidity and potential liquidations.

Relevant Reserve Pools

Concerning the dying spiral dealing with algorithmic stablecoins earlier this 12 months, LFG created a reserve pool of Bitcoin and AVAX to assist the worth peg of the stablecoin UST.

Taking BTC for example, let’s go deep into this mechanism: LFG initially supposed to relieve the inflationary stress utilizing BTC. When merchants alternate UST to LUNA on the chain, it reduces the brand new provide of LUNA to management the dying spiral and make the whole system extra resistant to dangers. According to the on-chain mechanism proposed by Jump, 1 UST might be exchanged for $0.98 value of BTC. If the UST value is decrease than $0.98 for off-chain trades, merchants can purchase Bitcoin at a reduction from the reserve. Such a variant of the AMM mechanism is known as “The Defender”. Before the supply value of UST exceeds $0.98, the perfect place to purchase Bitcoin available in the market is its reserve pool. This mechanism offers a tough assist for the UST’s peg.

Neither BTC nor AVAX can be used as collateral. In truth, making an allowance for the fragility of algorithmic stablecoins, such a brand new mechanism was designed to peg the cash to stabler belongings, which, to a sure extent, certainly hedges in opposition to promoting. Despite the intelligent design, UST/LUNA can’t be redeemed in alternate for bitcoin on the chain in the meanwhile. What’s worse, as UST struggles to preserve its $1 peg, LUNA holders undergo a confidence breakdown and get trapped within the dying spiral.

LFG was pressured to dip into its pile of bitcoin to assist the token. According to the report, LFG has lent out $1.3 billion in BTC (28,205 bitcoins) to buying and selling corporations to maintain UST’s value peg. But that was only a drop within the bucket. The rising rate of interest and shrinking of steadiness sheet introduced on May 10 have made issues even worse. As the constant influx of established monetary establishments into the crypto marketplace for the current years brings Bitcoin a lot nearer to the US inventory market, Bitcoin dropped beneath $30,000 in response to the collapse of the US inventory and LFG’s huge loans of bitcoin.

AVAX is one other ecosystem that’s intently associated to Terra. Do Kwon introduced on April 8 that AVAX can be used to present a reserve in opposition to UST, and crypto customers can be ready to mint UST on Avalanche. This is an try to add extra use circumstances of UST via the various AVAX-powered tasks. Meanwhile, the Avalanche ecosystem additionally wants a stablecoin of its personal, which was why the 2 clicked immediately. However, this seemingly good partnership additionally has its pitfalls. The working precept of AVAX and UST, related to that of BTC that we talked about earlier, is to type a digital AMM pool the place customers who’ve earned UST on Avalanche’s C-Chain can swap $1 value of AVAX for $1 value of UST or convert $1 value of UST into 99 cents’ value of AVAX. It ought to be famous this uneven arbitrage design will solely be tapped into when UST falls.

Fortunately, for the time being, AVAX can’t be instantly used to mint UST. The AVAX reserve introduced by Do Kwon solely covers the 100 million AVAX acquired by LFG, a transaction that can be dealt with via the Avalanche Foundation in an over-the-counter (OTC) style. Details (e.g. the existence of any lock-up interval and the particular value) of the deal stay unknown to the general public. Compared to the practically 99% plummet of LUNA, AVAX, which dropped by over 20% in worth due to total market impacts, has not been a lot affected. At the identical time, the meltdown sounded the alarm for the whole public chain sector. Do all ecosystems want a stablecoin? NEAR, which launched its ecosystem-based stablecoin USN throughout its infancy, was extra affected than AVAX, and the loss of market confidence led to a downfall.

Other Algorithmic Stablecoins

The disaster of confidence in stablecoins attributable to the collapse of UST has prolonged to different stablecoin protocols, however this is additionally a very good alternative to check customers’ confidence in different protocols and their underlying mechanisms.

No traces of large-scale depegging have been noticed in decentralized stablecoins (besides fiat-collateralized USDC, USDT, TUSD, and so on.) earlier than or after the collapse of UST (with the depegging threshold set to 5%). An exception is HARD Protocol’s USDX which noticed a drop of about 8%. Even these partially collateralized like FEI and FRAX haven’t suffered extreme depegging.

Unfortunately, UST has destroyed the market confidence in stablecoins, particularly in these algorithmic stablecoins and stablecoin protocols that are not absolutely collateralized, e.g. FXS and SPELL.


According to some sources, the LUNA meltdown might be masterminded by HF Citadel Securities, suggesting that this well-known Wall Street participant shorted the market by lending out 100,000 bitcoins, which crushed LUNA’s peg mechanism and resulted in a vicious spiral.

Do Kwon first sought assist and tried to elevate $1 billion by promoting LUNA at a 50% low cost, however the proposal was rejected.

He then introduced Proposal 1164, which was handed with 35 voting in favor and 4 abstaining. The proposal primarily works to pace up the burning of UST. More particularly, it is going to enhance the bottom pool from $50 million to $100 million in SDR and cut back the Pool Recovery Block from 36 blocks to 18, which is able to enhance UST’s minting capability from $293 million to $1.2 billion.

Massive conventional funds of many huge Korean firms are saved at Terra, a Korean firm specializing in fintech and cost, within the type of UST. Such belongings will carry authorized penalties. Compared with LUNA, which principally impacts crypto traders, UST entails extra funds from non-crypto communities. In comparability, such funds include better tasks and extra demanding authorized provisions. If requested to select just one from the 2, LUNA will certainly be given up to guarantee the worth of UST. If no exterior funding might be relied on, the one manner round is to maintain minting LUNA to burn UST and to convert LUNA into extra precious belongings (BTC/USDT), thereby stabilizing the UST peg. The stabilization of the UST peg by way of the continued exploitation of LUNA’s worth is the one possible manner to save UST. As such, the LUNA value would possibly proceed to fall till the tragedy ends with the assistance of exterior funding.

In a phrase, LUNA has fallen from its pedestal.

As of this writing, the worth of LUNA is $0.8, and the UST value is $0.68.

*The above can’t be relied on as any funding recommendation.

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