If you are following the crypto space a bit you must have read and heard about the collapse of UST and Luna respectively. This has probably been the biggest collapse in crypto history. UST which was just a couple of days ago one of the largest stablecoins in the world got hit with a major coordinated attack with the aim of de-pegging UST.
Designing a algorithmic stablecoin purely controlled by code seems to be one of the holy grails and numerous projects have tried and failed miserably. One of the attack vectors is the so-called bank run - where a large number of customers withdraw their funds at the same time over concerns of solvency. Critics of the Terra project but also big believers were aware that a bank run was theoretically possible but for many the rewards overshadowed the risks… but this Monday the bank run was initiated.
Some early investigations indicate that Citadel is behind this attack (probably together with some other big hedge funds). So what did happen and how was that possible?
Initially, the attacker drained the liquidity pools on Curve Finance, which was ~$300M UST
The $300M UST were then dumped and sold in the market which caused panic and led to further sell-off and an initial depeg of UST.
UST backers like Jump and LFG (Luna Foundation Gard) started to sell their reserve assets like ETH and BTC to buy UST and stabilize the peg
Now, that’s exactly what the attacker was waiting for because it seems that the attacker had a short position on BTC. They knew that in order to stabilize UST the LFG had to sell their huge BTC reserves, which will consequently cause a broader market crash that we are indeed seeing now. The attacker basically profited (or is still profiting) from the short position as well.
The above led to mass panic and people started to sell on every exchange which led to further congestion.
This caused even more panic and people started withdrawing even more UST from Anchor, which caused a bank run for the protocol. Today over 50% of all funds were withdrawn in the span of 48 hours
During this period until today UST came down from $0.90 to $0.30 and now increased again to $0.60 at the time of writing
Luna crashed down from the Monday high of $60 down to $0.80 and now sits at around $1.80 at the time of writing ( a 97% crash just within 48 hours)
The situation now is very fragile. The Anchor Bank run is still continuing. In the recovery plan tweeted by Do Kwon today (Founder of Terra) he basically says that there is not much to be done then let the chaos continue in order that UST can start re-pegging. As an additional proposal, the burn rate of UST will be 4x so the chaos basically can vanish quicker. Further, UST will potentially move away from being an algorithmic stable coin and become an asset-backed stable coin. The Terra team has a lot of very smart people and surely they will try everything to rebuild the ecosystem but the trust is gone and it will take a long time to rebuild the trust in the broader community.
It was and still is mind-blowing how Terra went from a $20b market cap stablecoin and $40b market cap Layer 1 chain to nearly zero in less than a week.
The best thing one can do now is to take the learnings from this “black swan event”.
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Gm Gm, Really loving this piece and the work you do Rizvi. I also run a web3 news substack for underrepresented creators called Facesofweb3. Would you be open to a recommendation exchange? Our subscribers need to be able to find each other!
Great job, once again!