Terra Luna Crash: Ponzi Collapses from $40B Peak

Recently one of the most popular cryptocurrencies known as “Terra Luna” experienced a crash/collapse of epic proportion – financially devastating those heavily invested in the project and staining the public perception of cryptocurrencies as a whole.

Since 2020, I’d been loosely following the project from afar (never invested or did a deep-dive) and was impressed by a combination of its: (A) price action; (B) network effects/growth (particularly within Asia); and (C) staking reward APY (~20% on Anchor Protocol).

I had actually considered making a small investment in LUNA – as well as staking UST on the Anchor Protocol for seemingly reasonable-risk, high-reward returns.  Through a combination of luck and laziness – I never bothered investing in Terra.

Table of Contents

Terra Luna Marketcap Peak vs. Post-Crash

For context: In December 2020 – the market cap of Terra (LUNA) was ~320M. In March 2022 – the market cap of Terra (LUNA) was ~40B. In other words, in less than 2 years, Terra (LUNA) was up ~125X. (R)

A single LUNA token was valued well-under $1 in 2020 – and under $7 in July 2021. It reached $119.18 (ATH) in April 2022 (less than 1-year after being $7 and less than 2 years after being $1) – which meant many Terra (LUNA) investors were well in the “green” (profit).

Many of these same investors thought that the Terra ecosystem would continue thriving – and that the price action of Terra (LUNA) would continue “mooning” (#WAGMI).

Following reaching an ATH (all-time-high) of ~$120 in April 2022, LUNA’s price dipped to ~$80 within a week – but it quickly spiked back up to ~$95.  However, the price fluctuations weren’t any indication for the massive price avalanche that was en route.

In less than 1 month after reaching ~$120 per LUNA (~$40B marketcap) – LUNA tanked over a ~7-day span (between May 5 and May 12, 2022). The price of a LUNA token dropped from ~$80 to ~$0.01 – and its marketcap dropped from ~$28B to ~$0.6B – which sent the crypto world into a frenzy.

Note: This process was difficult to follow for me… someone without much knowledge of the Terra protocol and who’s not particularly well-versed in crypto, complex mathematics/finance, etc. The sonics/turbos knew it was a matter of time – and understood it completely.

What was the Terra Protocol?

Terra protocol was created in 2018 by South Korea-based Terraform Labs, which was founded in 2018 by Do Kwon and Daniel Shin.

Terra was a blockchain protocol that sought to develop and support “stable payments” and open financial infrastructure.

The entire protocol was supported by a basket of “seigniorage” (value of money minus (-) the cost of production) stablecoins pegged to various fiat currencies – all of which were stabilized algorithmically by the native asset of its blockchain – LUNA.

By creating fiat-pegged stablecoins, Terra effectively became a type of digital central bank. Its goal was to replace or provide a better “digital” alternative to banks, payment gateways, and credit card networks.

Terra sought to make financial transactions more efficient for both consumers and merchants – while simultaneously expanding its preexisting infrastructure and ecosystem tools to reach a transparent, distributed, and “neutral” payment system.

Before the Terra protocol became popular, its partner system called “CHAI” already had over ~2M users. CHAI was effectively a payment gateway based in South Korea.

Between 2018 and 2021 – Terra had processed over $300M in payments – which generated upwards of $3M in revenues which were paid out as staking rewards.

What was LUNA?

LUNA was the native token of the Terra Network, used for: (A) staking to secure the network; (B) governance; and (C) collateralization of price-stability of stablecoins.

The chief purpose of LUNA was to protect the network by locking value into the Terra protocol via a staking mechanism.  LUNA was essentially the foundation of the Terra Network and ecosystem – without it, Terra wouldn’t function.

Founders of the Terra protocol incentivized people to buy LUNA by giving “staking rewards” for LUNA to earn interest. The staking rewards were distributed to network validators and individual delegators.

The size of the rewards were contingent upon the size of the stake. As transaction volume on the Terra network increased, staking rewards also increased because part of staking rewards were derived from transaction fees.

What problem did Terra-Luna attempt to solve?

Price volatility. Due to a combination of: (A) issuance schedules and (B) speculative demand – most cryptocurrencies experience drastic price fluctuations over time.

Price volatility can be problematic in that it inhibits the adoption of cryptocurrencies as a primary means of exchange in transactions.

After all, who wants to receive a cryptocurrency that might tank in value by ~50% in less than 24-48 hours?

This problem gets worse when considering that various payments can be deferred – such as by moving past-due amounts from missed mortgage payments to the end of your loan term.

Terra protocol sought to address price volatility by: using an elastic monetary policy to create price-stable cryptocurrencies that are pegged to various fiat currencies.

In sum, the team behind Terra believed that elastic monetary policy would be an effective solution to stabilizing the price of cryptocurrencies – particularly when coupled with: (A) efficient fiscal policy managed by a designated treasury called “Luna Foundation Guard” (LFG) and (B) community member feedback/proposals.

How was Terra (LUNA) attacked? (Brief Explanation)

Of all the explanations online regarding the Terra (LUNA) attack, my favorite is courtesy of Onchain Wizard. (R)

  • March 2022: Luna Foundation Guard (LFG) initiates buying BTC to back UST. LFG accumulates BTC on 3/22 and by 3/26 has $1B+ in BTC.
  • April 1, 2022: 4pool Frax announcement for UST (UST-FRAX-USDC-USDT) on Curve.
  • Attacker borrows 100K BTC to start the position and perhaps sells into Kwon/LFG’s buying. LFG buys 15K BTC between March 27 and April 11 (average price ~$42K).
  • A $4.2B short position is taken – and the attacker simultaneously builds a $1B OTC position in UST. Stage is set to create a run on the bank and get paid on the BTC short.
  • In anticipation of the 4pool, LFG removes $150M from 3pool liquidity. Liquidity removed 5/8 and attacker used $350M of UST to drain curve liquidity (and LFG pulls another $100M in liquidity).
  • This starts the depeg down to 0.972 and LFG starts selling BTC to defend the peg, causing downward pressure on BTC while the UST run is just heating up.
  • Curve liquidity is drained at this point, and the attacker uses the rest of their $1B OTC UST position (~$650M) and offloads UST on Binance. Withdrawals from Anchor become panicked and people exit their positions.
  • LFG sells BTC to restore the peg and attacker sells UST on Binance. Eventually the chain becomes congested and CEXs suspend withdrawals of UST, fueling the bank run panic. UST depegs to $0.60 and BTC bleeds out.
  • Crypto community panics and wonders how much BTC will be sold to maintain the peg. Liquidations occur across the board and LUNA tanks because of its redemption mechanism. BTC dropped from $42K to $31.3K (~25%) since the 100K BTC loan.
  • Assuming the attacker covers/buys back the entire position at ~$32K (BTC), they ended up with ~$952M on the short.
  • The attacker may have taken a small loss on: (A) UST Curve dumps (~3%) or ~$11M and (B) Binance dumps (done at maybe ~$0.80) which is ~$125M.
  • Everything considered, Onchain Wizard estimates the attacker profited over $800 million.

For a video-based overview of the Terra (LUNA) attack and its details, I highly recommend watching David Lin (Kitco News) chat with Ronald AngSiy (Senior VP of Intellabridge) – as it might be easier to mentally digest than written breakdowns. (R)

How much money did the Terra (LUNA) attacker(s) earn?

Unknown. It remains unclear exactly how much the Terra (LUNA) attacker(s) profited.  Most suspect that they made at least mid 9-figures.

According to Onchain Wizard, the attackers likely made upwards of $800 million – by attacking the once 3rd largest “stablecoin” (UST) and shorting BTC.

Could the Terra (LUNA) attack have been prevented?

Some say that the Terra (LUNA) attack could’ve been avoided if circumstances were a bit difference and/or if different actions had been taken by the Luna Foundation Guard (LFG).

  • 4-pool live: If the 4-pool on Curve had already been live, the attack would’ve been a lot more difficult. Why? Because draining the 4-pool would’ve required $3B instead of $350M. The timing was not coincidental.
  • Twitter spam: Activity on Curve and depegging of UST was accompanied by a plethora of tweets – some of which may have been orchestrated directly/indirectly by the attacker(s). The twitter activity likely affected investing/trading behaviors to a significant extent.
  • Macro sentiment: The market sentiment was already relatively bearish due to a combination of the stock market being down. An attack like this may have been more difficult with strong bullish activity.
  • LFG movement of BTC: Some have said that if the LFG would’ve bought/sold BTC via different strategies – that this entire attack could’ve been avoided/prevented.

 Terra (LUNA) attack (Route 2 FI explanation)

A longer-winded explanation of the Terra (LUNA) attack comes from Route 2 FI (an investor/writer in DeFi and Web3) – who published a breakdown of what happened within a 4-day span that effectively “nuked” the entire Terra (LUNA) project. (R)

Curve sell off: There was an $85M UST-to-USDC swap that had the 3-pool slightly imbalanced. To rebalance the Curve pool, 50K ETH were sold and another 20K ETH were sent to Binance.

Twitter rumors: Following the Curve sell off, rumors about what occurred began circulating on Twitter.

Anchor withdrawal: A $2B withdrawal of UST occurs on Anchor Protocol – which causes the UST-LUNA peg to fluctuate between 0.987-0.995. Though the first defense was a success – the peg never fully recovered.

4 specific factors in place for attack: Route 2 FI states that there were 4 specific factors in place that resulted in a successful attack against Terra (LUNA).

  1. Attackers borrowed 100K BTC (which they short)
  2. Attackers make a $1B UST deal OTC
  3. Luna Foundation Guard (LFG) buys BTC in March and April to protect the peg
  4. An announcement is made revealing switch from 3-pool to 4-pool

Curve maneuvers: LFG attempted to remove $150M UST from the 3-pool on Curve to prepare for the new 4-pool, but the attacker used $350M of UST they bought OTC to drain the Curve pool – and now there’s zero liquidity on Curve.

Peg drops more: The peg drops to 0.97-0.98 (from 0.987-0.995) and deposits into Anchor begin to tank – all while rumors of these events continue circulating en masse on Twitter.

Anchor deposits nosedive: According to Route 2 FI, Anchor deposits were ~$14B at peak – and they were dropping by ~$10M per minute as a result of sheer panic.

Peg stays low: The peg ends up around $0.97 and people are fearful.

Markets down -> BTC down -> Alts down: The entire NASDAQ and stock market were down significantly – which caused the price of BTC to drop. As most know, a drop in BTC generally causes altcoin value to drop as well – such that LUNA’s price drops.

UST selling on Binance: The attackers now have $650M UST that they’re beginning to sell on Binance – which triggers a massive depeg.

LFG takes action: The Luna Foundation Guard (LFG) steps in and sells BTC to buy UST in effort to restore the peg.

Death spiral in motion

  • Attackers dump UST.
  • LFG attempts to restore peg by purchasing UST (simultaneously selling BTC).
  • BTC price drops from high sell pressure.
  • UST depegs more – which increases panic.
  • Anchor deposits drop because people are fearful – such that start selling UST on exchanges for lower prices, they want out.
  • This puts additional selling pressure on UST which causes it to depeg more.
  • LUNA price collapses because of fear over how LUNA/UST functions.
  • UST sell-off = more LUNA in circulation = lower LUNA price.
  • Traders short LUNA which further tanks LUNA’s price. Some also short UST.
  • Centralized exchanges ban/block UST withdrawals – and panic ensues.
  • LFG realizes they cannot escape this trap and lets the peg bleed – causing UST to drop to just over $0.01.

Do Kwon hints at rescue plan (?): Do Kwon, the founder of Terra (LUNA) hints (May 10, 2022) at a possible “rescue plan” for the ecosystem by tweeting “close to announcing a recovery plan for $UST. Hang tight.” Route 2 FI pointed out that Do Kwon took ~19 hours to launch this plan.

Peg suffering (?): At the time of Do Kwon’s initial tweet – the peg hadn’t suffered “too much” which could be observed via UST/USDT charts.

Everyone awaiting rescue: Everyone is waiting for an official rescue plan to be released and initiated. While waiting, the price of LUNA remains between $30 and $35 for ~24 hours on May 10, 2022.

Preliminary plans: LFG seeks $1B+ in capital to rescue Terra (LUNA). Larry Cermak tweets that Jump Capital, Celsius, and Jane Street Capital were committed to helping rescue Terra (LUNA) by raising $1B to $1.5B in capital. (Details: 50% discount to LUNA spot with 1-year lock + monthly linear vest over 1-year. Total of $700M in commitments as of May 10).

Market reaction: The market reacts to this Tweet and within the next 4 hours, the price of LUNA plummets to $15. Why the drop? Route 2 FI suspects that the plan didn’t look good. After all, who would want to buy LUNA for $15 (50% discount when the price is $30) with a 1-year lock during an ongoing “death spiral”?

Do Kwon launches rescue plan: Do Kwon launches a rescue plan the next morning but it’s not well-received. Most believe there was zero rescue plan for the #LUNAtics because the plan is to slowly bleed out the LUNA token to save the peg.

Do Kwon hints at alternative model: Do Kwon then hints at moving away from an algorithmic stablecoin model and instead utilizing something else (e.g. akin to FRAX).

LUNA price drops more: At this point LUNA drops from $5 to $0.80 within a ~5-hour period.

LUNA hyperinflation: According to OxHamz, LUNA hyperinflation would last “weeks to months” (if an orderbook flow limit of $40mm per hour it would take 10 days to clear $10bn of UST at $2.50.”)

People considering buying LUNA: At this point, many people are wondering whether it would be smart to buy some LUNA “on the cheap.” Furthermore, many “influencers” are trying to hype it up because staking rewards for LUNA jumped to 22%.

Buying LUNA now = risky AF: Route 2 FI emphasizes that LUNA can effectively die (dropping all the way to $0 in value). Even if you get 22% APY rewards on the LUNA token, how valuable are those rewards when the token drops another 99% in value?

Terra’s future (?): Route 2 FI isn’t sure whether Terra will have a future. He acknowledges Terra has: good infrastructure in place; ~100 dApps; smooth system & nice UX; and some high-IQ people involved with the project. He thinks there could be a rebuild of some type.

How UST lost its dollar ($) peg… (Jonathan Wu explanation)

Because many don’t understand how UST can lose its “peg” to the dollar ($) – Jonathan Wu (Jonwu.eth) of Aztec Network wrote up a comprehensive explanation which I’ve summarized for reference. (R)

UST is a dollar-pegged stablecoin that had depegged twice in the month of May 2022 – hovering at around $0.90 to the dollar.

How does UST work? You can always redeem LUNA for UST dollar-for-dollar and vice-versa.

If the value of 1 LUNA = $100 – you can redeem 1 LUNA for 100 UST. If you have 100 UST and the value of 1 LUNA = $100 – you can redeem the 100 UST for 1 LUNA.

Important: You can always redeem 1 UST for $1 worth of LUNA, even if UST is worth less than $1 (e.g. $0.50) because UST is intended to function as a stabilizing mechanism within the Terra ecosystem.

Stablecoins require utility to: (A) maintain demand and (B) defend their peg – but where did UST get utility? Anchor Protocol.

Anchor Protocol: Paid out ~20% APY in interest to stake UST – incentivizing many people to participate and earn interest/rewards.

A large percentage of UST’s total circulating supply was in Anchor Protocol. As of early May 2022, ~40% of UST was in Anchor – but at one point [in Terra’s existence] over 70% of UST had been in Anchor.

Questions asked by jonwu.eth:

If something pays ~20% risk-free, why not borrow a lot of money and make it pay 100+%? (In other words, you know you’ve got ~20% APY without much risk – why not borrow as much as possible at a lower APY on the borrow to get filthy rich?)

Apparently that’s what Abracadabra (MIM’s) “Degenbox” did. How did Degenbox work? Below is the gist. (R)

  1. Users deposited UST tokens into the “cauldron” to either borrow MIM or leverage their position.
  2. Degenbox bridged UST back to the Terra blockchain via the Shuttle bridge (85% of UST deposited was bridged & 15% was left on Ethereum mainnet to guarantee smooth withdrawals).
  3. UST arrived on Terra and is provided to Anchor Protocol – which pays out interest in aUST.
  4. aUST tokens acquired from Anchor were then bridged back to ETH mainnet and deposited into Degenbox – wherein the tokens produced a yield that was harvested and distributed to all users that deposited UST as collateral.

According to jonwu.eth, Degenbox and the remainder of Frog Nation DeFi ecosystem unwound in January, which depegged UST and sent LUNA down from $100 to $46.

How can the Terra foundation give out 20% in free money each year?

The “LFG” (Luna Foundation Guard) or the entity in charge of managing Terra’s multi-billion-dollar ecosystem fund.

LUNA/UST dynamics…

Each UST in circulation decreases the circulating supply of LUNA. The ultimate goal would be for every single LUNA to get burned for UST.

When there’s a large amount of UST in circulation – there’s significantly less LUNA. Holders should want to diamond-hands LUNA due to the fact that it’ll continue going up in value the more people are buying UST.

In the event that demand for UST skyrockets to the extent that you’re the final LUNA holder, you have significant “redemption power.”

For this reason, it makes sense that the LUNA marketcap being less than the UST marketcap is nothing more than “FUD” (fear-uncertainty-doubt) – because the lower marketcap doesn’t mean what most think it means (e.g. LUNA is less valuable).

Most important were the: (A) directionality and (B) stability of LUNA’s price. It becomes a huge problem if the average redemption price of LUNA for UST is high relative to LUNA’s current price.

As jonwu.eth explains:

  • LUNA price high
  • LUNA burned, many UST minted
  • LUNA price collapse
  • UST redeemed for many LUNA

Hypothetical scenario…

  • If the price of LUNA is $1B – then someone could mint 1B UST by burning a single LUNA.
  • Hypothetically, let’s say the price of LUNA collapses to $1 for no good reason.
  • That individual could convert 1B UST to 1B LUNA – which means there would be a TON more LUNA in circulation being dumped on the open market.

UST had similar dynamics to many other algorithmic stablecoins – except in addition to the algorithm, they also were backed by the Luna Foundation Guard (LFG).  This meant that LUNA was effectively stabilized by a combination of: (1) contracts and (2) LFG (Do Kwon et al.).

The LFG had previously been in charge of bootstrapping Anchor Protocol by: selling treasury LUNA and filling up the Anchor Protocol Reserve – the fund that paid out ~20% APY to UST stakers).

The bet was that: UST burned for staking; LUNA price goes up; sell more LUNA to fund the Anchor Protocol Reserve.

Long-term goal: (A) UST skyrockets and is widely-utilized stablecoin before LFG runs out of money and (B) LUNA “moons” – and everyone is happy.

Do Kwon: “Don’t wanna get another DM about the Anchor Protocol yield reserve. What do you want?” 17,443 votes: 300M.

Everything changed when Degenbox collapsed in January 2022 – such that potential usage of UST in a 10-figure cross-chain ecosystem spearheaded by Daniele Sesta was no longer ideal.

Thereafter, on February 22 (2022): Jump Capital and Three Arrows Capital (3AC) joined a $1B OTC deal to purchase Bitcoin (BTC) – which was considered extremely important for Terra’s stability, LUNA’s value capture, and future developments of LFG.

The concept? 1. Get the Bitcoin gang on board and 2. Give redemptions UST to BTC off-ramp in addition to preexisting UST to LUNA off-ramp.

On May 7, 2022: An attack on Terra-Luna-UST occurs and was deliberate and coordinated. A massive 285M UST dump on Curve and Binance by a single entity followed by massive shorts on LUNA and hundreds of Twitter posts for staging.

Essentially, the 9-figure UST dump pressured the peg of UST to LUNA – which caused downside instead of upside:

  • UST unstaked and dumped
  • UST depegs due to downward pressure
  • UST holders redeem for $1 of LUNA
  • Dump LUNA

However, the presence of Bitcoin (BTC) in the LFG Treasury complicated things a bit…

When the LFG bought Bitcoin – it triggered a massive spike in LUNA which allowed significant high-basis UST minting.  At the same time, LFG DCA’s into Bitcoin at an average price over $40K.

At this point, Bitcoin is pushed lower due to macro and expectations that the LFG will be forced Bitcoin sellers due to UST peg pressure. Redemptions of UST to BTC end up being losses for LFG when they could have sat on stablecoins.

As of May 8, 2022: The LFG Council commits $1.5B to defending the UST peg, collateralized against Bitcoin reserves. (Loan $750M worth of BTC to OTC trading firms to protect the UST peg & loan $750M UST to accumulate BTC as market conditions normalize.)

Why’d they do this? The deeper the liquidity the greater the degree of difficulty it is for a single entity to push the price further from $1. This is why Jump Capital and Three Arrows Capital were involved – they have significant capital and are helping prevent UST death.

What happens next? Friendly market-makers go to work on deploying a piece of the Bitcoin treasury to market-buy UST and keep the peg up. Hope is there’s more Bitcoin collateral in LFG than there is bank-run pressure from UST-related FUD.

Outcome scenarios:

  1. Treasury ends up drained but UST stabilizes. LFG was hoping to buy Bitcoin back at a low basis. A win would’ve looked like: BTC forced to $30K; UST peg restores; LFG buys back into BTC at lower basis. Sell BTC, restore the peg, buy BTC – and profit.
  2. Do Kwon and the LFG cease their UST defense, annihilating LUNA holders and allowing UST to settle at collateral value.

Wu’s TL;DR: “UST is 100 magic dollars backed by 20 BTC and 80 magic beans – but some people don’t think it’s worth 100 real dollars, so LFG sells BTC to buy more magic dollars to convince people they’re worth 100 real dollars, all so the magic bean holders don’t get sad.”

Who attacked Terra (LUNA)? (Main suspects)

Unknown. It’s not possible for anyone to know based on current information. Moreover, even if it was known – the attackers could NOT be held legally accountable because they didn’t technically do anything illegal.

In this situation, they have nothing to gain (and a lot to potentially lose) from coming forward. It is possible that Do Kwon might have some idea – but whether he’d actually say who this was is unclear.

Prerequisites for attacking LUNA/UST:

  1. Minimum of 9 figures – likely 10 figures
  2. Holding UST & LUNA
  3. Knowledge of Curve (understanding how it works)
  4. Funds ready for deployment
  5. Outside of U.S. (likely due to fewer regulations)

Keep in mind that I am NOT accusing anyone listed here as being involved in the attack. These are merely a list of potential “suspects” who would have the ability to pull off such an attack.

Understand that it may turn out that NONE of the people/entities listed here were involved in any way… whoever did this was clearly high IQ and thus could effectively cover their tracks and carryout financial maneuvers knowing that nothing could trace back to them with conclusiveness.

Justin Sun (TRON creator)

Tweet: “I am buying #UST” (a day before the short attack).

  • Do Kwon: “Your Excellency what u up to”

Tweet: “I may have a secret plan ;-P”

The next day the short attack happens. Justin Sun has a personal net worth estimated to be in the mid 9-figures – meaning he’d easily have enough of a bankroll to pull this off.

Sun also has access to a variety of high IQ developers working in crypto – such that it could’ve been a collaborative, premeditated “group” attack by his team.

When asked if he performed the attack he responded: “No it was not me.” (But would he really admit it if it were him?)

Many have stated that Justin Sun would have proper motive to perform this attack: take down a competitor (Terra/LUNA) while simultaneously bolstering funds for his TRON ecosystem.

What’s more – TRON just launched a protocol that functions almost identically to Anchor Protocol… so he’d have significant motive to crash Anchor if possible.

Interestingly, Justin Sun is heavily promoting/marketing his “USDD” stablecoin (and high APY ~40-50%) immediately after the Terra (LUNA) collapse.

Sun also expressed full support for a proposal submitted within the Terra (LUNA) community that recommends refunding the “poorest” 99.6% of wallets with funds remaining in LFG.

Sun’s words: “Fully support this proposal. I sympathize with all in this unforeseen crisis. I would like to commit $10 million USDD to the recovery for the bottom 236K UST holders. I believe this will benefit the ones affected the most and show our unity! Details to be announced soon!”

Although this could merely be some form of charity (legitimately feeling bad for people) – many believe it’s a marketing tactic to appear in good standing while marketing USDD (getting more people using the stablecoin/protocol).

Some have gone as far as to speculate that Sun may have a guilty conscience due to being behind the Terra (LUNA) attack such that he’s committing a small percentage of his attack profits (~$10M) to those who lost a lot of money holding UST.

CZ (Changpeng Zhao) and/or Binance Team

James Harris (ex-FBI, ex-IBM, engineer/scientist) believes that CZ, the CEO of Binance, may have been behind the Terra (LUNA) attack based on analysis of CZ’s tweets post Terra (LUNA) implosion.

Harris dissects a series of Tweets by CZ that make CZ a potential person-of-interest (POI) in the Terra (LUNA) takedown.

  • CZ: Reading some comments on Twitter, it just occurred to me that I haven’t asked our team if @Binance had any UST. (I don’t have access to our admin backend, for security reasons. I always have to ask someone to get info.) I just asked now. (May 15, 2022)

According to Harris… (R)

“Statement analysis is one of those “soft skills” that is important in life. It served me well as an FBI Agent, and continues to inform how I make decisions. Some friends highlighted a thread recently which made my antenna go up.”

Bottom line up front (BLUF): “I’m not accusing anyone of a crime, but when someone uses distancing, redirection, and hypotheticals in response to a question – it’s odd. When they pose the question and do that, it’s really odd.”

In the first part of CZ’s tweet, there’s a question posed: Does Binance own any UST? He posed it, and he’s the CEO, so you would expect an answer by the end of this. But there’s also distancing, and inappropriate “laughter” (laughing/crying emoji). He doesn’t know – he has to ask his “team.” And Twitter is why he thought of it.

Objectively, for a CEO to have no idea if his company has a toxic asset – and to think of it only when Twitter users mention it – is weird. The laughter emoji seems extremely out-of-place, like nervous laughter in an interrogation. And there’s distancing – he has to ask “the team.”

It also suggests we’re starting from an answer of “maybe.” Remember that. The distancing continues. Unprompted, (because this is his thread), he then discusses that he has no access to admin backend and always has to ask someone for the info.

Harris notes that this segment about the admin backend tells us a lot. It implies the answer to the question is in the “admin backend.” It also makes it 100% clear that CZ has zero access to the backend for “security reasons” and he has to ask his team.

In other words, CZ is implying: “I have no idea what’s in there, but if it’s bad, there’s no way I’m culpable – it would’ve had to have been someone else on the Binance team.” Harris mentions that suspects often behave this way in interviews saying things like: “Oh, that computer? NO idea what’s on it!”

When someone suggests the answer to a question exists in a specific place, and claims they’ve NEVER had access to that place (yet they know who does) – it should make your radar “blip.”

Next CZ says he asked the individuals who do have access to the backend… and the answer?

  • CZ: “We probably do have some from trading fees. Probably valued at close to 0 now. (Think of it as free trading in the past, haha). This just wasn’t on my mind. Not how we prioritize things. Users first.”

The people who have access and control to the source of truth tell him (and he claims), “Probably.” But since it’s now valued at “close to 0,” it’s not a problem, just a free gift of trading for some unlucky UST holders (with another inappropriate laughing/crying emoji).

There’s additional distancing here when he suggests “this just wasn’t on my mind” because his mind was focused on “users first.” Based on this, we know CZ has suggested: (1) maybe Binance has UST; (2) implied there’s an answer; (3) suggested there’s someone who knows; (4) distanced himself from the answer; and then (5) stated that the answer was “probably.”

According to Harris, this is a lot of mental gymnastics to go from an initial “maybe” to “probably.”

  • CZ: I did ask about the rumored ‘2nd round of investments or UST’. There were discussions, never closed. Binance did not buy UST.”

He also mentions that there were “rumors” of a “second round of investment in UST” (which was NEVER the hypothetical question he initially posed) – and he answers it.

CZ asked if maybe Binance owned UST, claimed he asked the source who would 100% know the truth (as he wouldn’t know), and he heard back “probably” (nothing conclusive). He ends his tweets by suggesting that there were mysterious talks that he (CEO) didn’t know about and answers an entirely different question.

Harris likens these responses to “unforced fouls” in “incident response” public relations and claims that if investigators weren’t suspicious before, they should be now.

Harris’s epilogue: This is like watching the Target data breach response on fast forward. CEOs need to stop tweeting… I just started to say “until,” but no. That’s it. Stop. This just keeps getting worse: (And he references a new series of tweets by CZ):

  1. Some interesting updates, full transparency and lead to protect users: As it turns out, most UST pairs were 0 fee to begin with. (I didn’t know that, our team had to tell me.) So not much UST there.
  2. Binance received 15,000,000 LUNA (at peak worth $1.6 billion USD, now not much) as part of the original ($3M) invest. 560x return at peak. It still sits on the address received at. Never moved or sold. (He lists the address).
  3. On this same address, we have about $12,000,000 UST from staking over time (not bought). Also never moved or sold.
  4. Now the important part. To lead by example on protecting users, Binance will let this go and ask the Terra project team to compensate the retail users first, Binance last, if ever. Binance (after a 5 min discussion) fully support this proposal. (They link to the proposal suggesting reimbursement for the poorest 99.6% of wallets.)
  5. Protect users.

kirankumarj.eth asks: “What happened to BTC from LFG which went to your exchange? 23,000 BTC.

  • CZ: “I did ask about this, and know now. But we still have user privacy to respect. The Terra team need to disclose it on their own. They are just so slow in communicating with the community.”

Seller of BTC to Do Kwon: Whoever sold BTC to Do Kwon as an OTC order is a suspect because they then received a lot of UST in exchange for their BTC. Essentially they had enough UST to initiate the attack that occurred.  (This entity may be revealed in the future.) Do Kwon knows who sold OTC BTC to LFG – but has not made this information public.

Three Arrows Capital (3AC) & Zhu Su

Zhu Su, founder of 3AC, had the preexisting knowledge (IQ) and capital (10 figures) to execute this attack. We know that 3AC was involved in some direct OTC dealings with Do Kwon and the LFG.

Zhu Su is also well-versed in UST/LUNA and was well-aware of how someone could pull off a Soros style “Black Wednesday” attack on Terra – as he regularly engaged with UST/LUNA critics on Twitter who highlighted this risk.

Zhu Su likely understands Curve better than 99% of users. Moreover, he was regularly tweeting about the Terra fiasco from May 5 to May 13 – sometimes with subtlety and “hints.”

He also expressed sympathy for those who lost a lot of money in the process – but public expression of sympathy could be a complete “psyops” (i.e. misdirection tactic) to dissuade anyone from thinking he was behind the attack.

May 5-6, 2022

Foobar: As an expert yourself, please explain to us plebs how selling half a billion dollars of BTC reflects your bullish views ser.

  • Do Kwon: “They didn’t sell 500M BTC to us. We worked with 3AC to twap buy in markets bc they’re better at pressing the green button than we are. Obv really.” (R)

(It should be noted that Zhu Su of 3AC “retweeted” Do Kwon’s response – perhaps for a variety of reasons.)

turnip: Source?

  • Do Kwon: “MFer I am the source.”

Zhu Su: “For I am the Size, and the Source – he said to the poors.” (Iterating what Kwon just tweeted without retweeting it.)

May 8, 2022

H.E. Justin Sun: “I am buying #UST.”

  • Zhu Su: “Chad.” (Implying that this is a smart move – or perhaps that they’re in on this together and essentially frontrunning.)

May 10, 2022

Zhu Su: “I pass my life in preventing the storm from blowing down the tent, and I drive the pegs as fast as they are pulled up.” – Abraham Lincoln (This is a legitimate Abe quote with one keyword that should raise a red flag: “pegs.”)

May 13, 2022

Zhu Su: “Some ppl asked me why I am keeping LUNA in my profile. It’s bc I invested in it, believe in the community, and share in the common purpose. The attacks and subsequent de-peg risks were flagged by critics; the fast growing ecosystem should’ve done more to move slowly + safely.”

“This has been an incredibly humbling week and it’s difficult to find the right words. Was discussing with @hasufl a bunch last night on whether to record an episode on algo stablecoins, and I think will likely do it to give some more longform thoughts.”

“The critics had genuine concerns about peg risks and going fwd discussion must be encouraged, “fud” must be met with refutations, growth must be organic even if slower.”

“This is Terra’s DAO hack moment. I will not pretend to know what the future holds but I will do my part to help. As for critics of me personally such as @NTmoney and others, I accept it all.”

“I’m sorry. In a different life where I wasn’t invested in it, I would’ve been far more likely to be cautious (as I had been on ESD/DSD and OHM). Going forward being able to separate analysis from bags is my focus.”

Andre Cronje

Known as the “DeFi Satoshi Nakamoto.” Worth mid-to-upper 9-figures.

Has the IQ and acumen to pull off a large-scale attack on Terra (LUNA). Likely still participates in DeFi and assesses various projects – could’ve found a way to capitalize off of Terra (LUNA) while staying under the radar/lying low.

He apparently left the “DeFi space” with co-developer Anton Nell… this duo could’ve pulled it off.

Gigantic Rebirth (GCR)

Gigantic Rebirth is high IQ with a deep understanding of cryptocurrencies like Terra-LUNA/UST and DeFi. He put up $10M in a bet with Do Kwon that LUNA would be under $88 by March 2023.

He also wanted to up the ante to $20M but Do Kwon didn’t reply – so he took out an additional $10M short position against LUNA.

Clearly this dude has some massive funds (perhaps $100M+, perhaps $1B+?) to tie up $20M in a couple of bets. (Perhaps coordinated with a cohort of Terra/LUNA skeptics like Sensei Algod and Freddie Raynolds.)

Pantera Capital

A U.S.-based investment firm that would have the preexisting knowledge and funding to pull an attack like this off.

Although many other big-time investors and investment firms were actively tweeting about Terra LUNA/UST during its downfall (May 5-12) – Pantera Capital and its CEO (Dan Morehead) were radio silent.

In fact, I cannot find a single tweet about anything other than BTC and inflation from May 5-12. Not even mentioning UST/LUNA would be a smart way to avoid suspicion.

Do Kwon

Some suspect that Kwon may have known that Terra (LUNA) would eventually fail – so he orchestrated its demise.

Others think Kwon may have wanted a break from the project – such that he intentionally set it up to crash while collecting a significant amount of money doing so.

Personally, I do NOT think Do Kwon was behind this event – as it severely damaged his public reputation/status in crypto, future earning potential, and may have endangered himself and his family.

U.S. Government

Many have pointed out that the U.S. government may have orchestrated a covert takedown of Terra (LUNA) to cripple consumer confidence in cryptocurrencies for numerous reasons:

  1. Get consumer money out of crypto (and into banks)
  2. Prevent consumers from losing more money in crypto to foreign scams/rug-pulls
  3. Protect consumers/investors
  4. Introduce a government “crypto” (and emphasize how much safer it is than Terra/LUNA).

Foreign government

It’s also possible that a foreign government saw a perfect opportunity to capitalize off of the Terra (LUNA) cryptocurrency.

Examples include: Russia, North Korea, etc. They could’ve earned a significant amount of money to fund military endeavors, enrich the country, etc.

Citadel & Blackrock

It was originally rumored by many, that Citadel and Blackrock were behind the attack on Terra-LUNA.

Allegedly these groups borrowed 100K BTC from Gemini and initiated a coordinated attack. However, most high IQ analysts do NOT believe Citadel or Blackrock was behind the attack.

“It’s probably NOT going to be one of these really large financial shops from TradFi – a lot of these guys have serious problems getting approval for compliance to even touch a lot of these kinds of assets.” – Kevin Zhou (R)

Why not Citadel? Flagship product “Wellington” which contains a majority of the funds. If Citadel were to get involved in crypto without authorization from its investors, they’d be hammered with lawsuits. Odds of Citadel being behind this attack? Extremely low.

Why not Blackrock? Functions primarily as an ETF provider wherein they aim to passively earn small (%) management fees on massive long-term investments (think trillions) – while slashing unnecessary employees (e.g. managers). Odds of Blackrock being behind this attack? Probably lower than Citadel.

Note: Some individuals may want the public to assume that Citadel and/or Blackrock were behind this attack because it takes any suspicion away from them.

Sam Bankman-Fried (SBF)

Doubtful that this guy was the attacker, but he’s definitely smart enough and has the resources necessary to pull it off.

If SBF pulls off the attack, he: (1) has more money to donate to altruistic ventures; (2) exposes Terra-LUNA/UST for all to see (as a bad project); and (3) prevents a less-altruistic entity from performing this attack in the future (e.g. Blackrock).

Moreover, if he can convince the LFG to refund 95-99% of poorest holders – he effectively pulled of a “robin hood” style maneuver (finessing wealthy UST/LUNA holders out of $). This dude plays 10D chess.

Foreign investment fund

Some believe a large foreign investment fund saw an opportunity to pull off the attack and acted swiftly.

Note: This was likely a coordinated attack with multiple attackers working together – not an isolated/single person. If you have any other ideas regarding who should be considered a suspect – mention in the comments.

Was Gemini exchange involved in some capacity?

The cryptocurrency exchange Gemini was initially suggested to be indirectly involved in this attack whereby the “attacker(s)” used Gemini to acquire a 100K BTC loan.

Gemini completely denies this allegation (via Twitter): “We are aware of a recent story that suggested Gemini made 100K BTC loan to large institutional counterparties that reportedly resulted in a large selloff in $LUNA. Gemini made no such loan.”

Many have stated that, even if Gemini made the loan that fueled the attack, there’s absolutely 0% chance they’d publicly admit it. They may have zero obligation to prove that they weren’t peripherally involved.

Was the attack on Terra (LUNA) illegal?

Nope – there’s no evidence that anything done here was illegal, every action taken was completely legal, despite the subsequent wreckage.

No LUNA/UST holders were hacked and no money was directly “stolen” from holders. Terra-LUNA was not taken down through an exploit or smart contract flaw.

Terra (LUNA) was taken down via someone taking advantage of the macro market, a highly-specific timing window, possible spread of fake news/spam tweets, and a cascade effect (sell-offs, panic/fear sentiment, etc.).

This attack was similar to the George Soros “Black Wednesday” attack on the Bank of England in 1992.

The attack involved executing series of large-scale cryptocurrency transactions utilizing a combination of Bitcoin (BTC); Curve (CRV); and UST/LUNA – with a starting 9-figure sum (attained via loan).

It also required knowledge of: (A) Luna Foundation Guard (LFG) activity (buying/selling BTC; UST/LUNA; managing Curve pools); (B) market reactions (traders, investors, etc.); and (C) exchange reactions (to buy/sell pressures for UST/LUNA).

Although this was termed an “attack” (because it effectively destroyed Terra-LUNA/UST) – it wasn’t illegal. Moreover, there’s no regulation in crypto – so even if there were technically “fraud” or something of the sort, it would be completely legal.

One could argue that the attacker actually had good intentions. How?

  1. Expose Terra-LUNA/UST: Expose the weakness of algorithmic stablecoins before more people invest in this project.
  2. Beat “evil” attackers to the punch. Perhaps someone suspected it would be a matter of time before Terra-LUNA/UST was attacked – such that if they didn’t act soon, someone evil (or eviler than them) would pull off the attack in the future (e.g. foreign governments, etc.). Better to have the money in the hands of a neutral or altruistic person/entity than a malicious one.
  3. Avoid future larger attack (?). If Terra-LUNA/UST grew more significantly, an even larger attack may have occurred in the future – causing even more substantial devastation. Maybe it was better to inflict significant damage now so LUNA/UST is properly exposed.

It’s also possible that the “attacker” had planned this attack for quite some time – such that it was premeditated. With a little bit of luck/timing, an opportunity opened up and the attack was excecuted.

Ryan Selki (CEO of Messari): What happened with Terra wasn’t fraud, it was overconfidence in the investors of last resort who had already backed the project. And reckless growth at a time the market was slowing down.” (R)

Did anyone see problems with Terra (LUNA) prior to the attack?

There were numerous high-IQ people that sensed trouble brewing with Terra (LUNA) prior to its demise/collapse. Examples are posted below.

Freddie Raynolds (@FreddieRaynolds)

Freddie Raynolds was the first person I’m aware of to suggest that the Terra protocol was vulnerable to attack – and that an attacker could “profit heavily.”

He began receiving a lot of hate from the #LUNAtics – with some referring to him as the “Peter Schiff of Terra” or a “wannabe Michael Burry.”

November 25, 2021

“A few weeks ago I responded to @tbr90’s tweet with a brief outline of how a wealthy attacker could not only break Terra Money but profit heavily doing it with a Soros style Black Wednesday attack. Below I provide a detailed breakdown… ~$1B capital needed.” (R)

  1. Long $100M LUNA (PnL impact: $0 & Net PnL: $0)
  2. Purchase $100K LUNA and immediately withdraw from exchange and swap to UST – using the Terra seigniorage mechanism. Fee is 0.5%. Repeat 10,000 times (use a bot) so you accumulate 500M UST for $502.5M. (PnL impact: -$2.5M & Net PnL: -$2.5M).
  3. Sell initial $100M LUNA from Step 1. Since there has been $500M of LUNA market bought in Step 2 looking at the current order books/PA I think reasonable estimate here is +30% or $30M profit. (PnL impact: +$30M & Net PnL: +$27.5M).
  4. Deposit $200M of bETH on Anchor Protocol and take a loan out for 100M $UST. (PnL impact: $0 & Net PnL: +$27.5M).
  5. Short $100M LUNA (PnL impact: $0 & Net PnL: $27.5M).
  6. In $100K chunks use seigniorage again to convert 500M UST (Step 2) and 100M UST (Step 4) to LUNA. After each conversion dump the LUNA. Conversion fee 0.5% and the rate limit means this step will take a week. 600M UST sold for ~$597M. (PnL impact: -$3M & Net PnL: $24.5M).
  7. Close LUNA short from Step 5. Since there has been $600M of LUNA market sold in Step 6, I think a reasonable estimate here is -30% for LUNA price or $30M profit. (PnL: $30M & Net PnL: $54.5M).
  8. Pay back loan from Step 4 and reclaim bETH. (PnL: $0M & Net PnL: $54.5M).
  9. After a few iterations the protocol will collapse at Step 6. Many #Lunatics assume that LUNA can never have a value of 0. This is only true if the future circulating supply of LUNA isn’t infinite – but above process leads to infinite LUNA being minted.

Disclosure (Nov 25, 2021): I am short UST and long LUNA – explained here: “If you short UST you only lose whatever your interest payments are.

By longing LUNA you are exposed to unlimited upside and limited downside. So if I short $2000 UST after I year I should only lose $200 in interest payments.

If I hold $1000 of LUNA and the Ponzi continues, maybe it doubles in price so I gain $1000. Net gain $800.

If LUNA blows up tomorrow I also win because I can buy UST to repay my loan at cents on the dollar which is + $2000 and lose only -$1000 on my LUNA investment. Net gain of +$1000.”

Do Kwon: “Probably the most retarded thread I’ve read this decade. Silence is a perfectly acceptable option if stupid. Billionaires in my following, go ahead, see what happens.”

Sensei Algod (@AlgodTrading)

Among the first to not only: (1) sense trouble with LUNA – but also (2) put down a wager to showcase strong conviction – was Sensei Algod. (R)

March 9, 2022

  • Algod: “If $LUNA breaks new ATHs I will short it with size. It’s a big ass Ponzi, pretty sure VC’s will also hedge their investments on perps.”
    • Do Kwon: “Yeah but your size is not size.”
  • Algod: “Statistically you’re dunking on 99%+ of your community but alright. Someday your Ponzi will collapse, you can’t keep fueling anchor :).”

March 13, 2022

  • “Who wants to take a $1,000,000 bet that $LUNA will be lower price in 1 year than now?”
    • Do Kwon: “Cool, I’m in. Furthermore, happy to do the bet where UST is not depegged same time next year. I shall even give you 2:1 odds.”

GCR (@GiganticRebirth)

GCR wanted in on the same bet Sensei Algod had with Do Kwon – but for 10-fold the amount and was initially contemplating 50-fold the amount.

“Interested in same bet for 10 million dollars [considering offering 50 million, but escrow becomes tricky]. Would donate half to charity. Expect price to pump short-term, but in 1 year, supremely confident the current narrative is lost. @stablekwon.”

  • Do Kwon: “Sure, fund @cobie’s wallet and I will match. Gluck.”

Kevin Zhou (@Galois_Capital)

Stated in an interview with CoinDesk that it was “obvious” since November 2021 that an attack like this could happen with Terra (LUNA) – such that the cryptocurrency was highly vulnerable.

Linda Xie & cyrus.ismoney.eth (Scalar Capital) (R)

“Ok, so unless I’m missing something, this project isn’t gonna work. Terra is like the Maker model, if the only collateral you could post to create DAI is the MKR token itself.

I’m pretty sure posting MKR as collateral to generate DAI is a terrible idea. I’m not a monetary expert, but it seems to me that Terra suffers from the death spiral.

So in this example, Terra is the stablecoin and LUNA is the collateral. If Terra were to fall and break the peg, then it would depend on LUNA to save Terra.

But LUNA would fall as investors would panic, and then Terra would continue to fall, and then they would just keep contributing to each other’s demise.

This is exactly what happened to Nubits, like 3 years ago. I’m kind of surprised this idea is being tried again when it’s so trivially broken.

That being said, if I’m missing something, and you want me to dig in deeper, I’ll be happy to do a call with these guys and get some more info.”

OxHamZ (@OxHamz)

OxHamZ had been a longstanding critic of Terra (LUNA) on Twitter, discussing serious flaws in the protocol and potentially awful outcomes for investors. (R)

January 6, 2022: “Big doors swing on small hinges. There’s $10bn of hot capital in the $LUNA / $TERRA ecosystem but the daily on-chain exit is capped at $100mm. What’s the worst that can happen? Let’s dig in.” (R)

“Here’s a flow: Volatility causes lower LUNA prices; LUNA prices drop to create Anchor liquidations; Redemptions exceeded the $100mm cap and spreads widen; Spreads amplify LUNA price drop.”

“How to make money? (1) Set up short LUNA perps once LUNA breaches $60; (2) Set up to buy bLUNA and convert into LUNA; (3) Set up to buy UST and convert to LUNA if peg breaks.”

Hasu (@hasufl)

Although I cannot find the tweets specifically warning people about Terra (LUNA) – many have stated that Hasu was among the first to warn people about UST/LUNA and under-collateralized stablecoins.

June 17, 2021: “At every opportunity, I have warned that undercollateralized “stablecoins” cannot work. Some of them can survive for a few weeks or months, but they all fail eventually, leading to large financial loss for late participants. Shame on everyone who still calls them “stablecoin” today, mentions them in the same articles as USDC, USDT, DAI, etc. instead of what they actually are: pure Ponzi schemes.” (R)

Alberto Vega

Wrote a series of articles on Medium discussing the Terra ecosystem and why it was destined to fail. These articles were written January 20 & February 10 (2022). Alberto goes as to far as to say Do Kwon is highly intelligent and knew the entire time that Terra was unsustainable.

  • Bezzle, Reflexivity and the upcoming collapse of LUNA and UST (R)
  • A simple picture of the Terra ecosystem (R)

KALEO (CryptoKaleo)

Not certain whether KALEO implied that LUNA would likely crash due to unsustainability/vulnerability OR whether LUNA would crash as a result of a bear market – such that people would be afraid (i.e. lack the balls) to take positions in LUNA and other alts.

January 9, 2022: “2022 you’ll get a second chance at $10 LUNA, but you probably won’t have the balls to take it.”

  • Do Kwon replies: “I’ll take that bet – $20mil? Settle EOY 2022. Make it $200M, DGAF. But put up or shut up.” (KALEO never took the bet with Kwon, but Kwon was clearly triggered by KALEO’s tweet.)

Reactions to the Terra-Luna crash…

Included below are a variety of reactions to the Terra (LUNA) crash.

Zhu Su: 3 schools of thought: (1) Algo-stable complete trash; (2) LUNA/UST grew inorganically, a more conservative could work; (3) LUNA/UST grew right speed, needed better safety parameters. Which camp are you in? 38% in 1; 23.2% in 2; 22% in 3; 16.5% undecided. (14,326 votes).

PhABC: Why is the LUNA community so focused on whether it was attacked or not? If you design a crypto economic system that can die to attacks, it will die. Just accept that it was a poorly designed system and own up to your mistake.” (R)

Hasu: “UST is worse than Bitconnect. At least Bitconnect didn’t masquerade as a stablecoin. When your Ponzi targets people’s savings (not investment) portfolio, there is a special place in hell reserved for you. Half of CT influencers, VCs, and trading firms are complicit.” (R)

SBF (Sam Bankman-Fried)

“Recently Do Kwon was compared to Elizabeth Holmes. Now, LUNA/UST were bad, and ended badly! So did Theranos. But the core accusation against Holmes isn’t that Theranos failed.

Startups fail all the time. The accusation is that she lied. She said that Theranos was doing specific things that it wasn’t doing. The LUNA/UST mechanism wasn’t misrepresented – it was, in fact, very transparent.

And, I think it was transparently going to falter at some point. Do Kwon obviously stood by it, morally and in terms of press, long after he should have backed off.

But he didn’t claim that UST was backed 1:1 by USD. He claimed, accurately, that it was backed by a bunch of volatile assets. It was very publicly clear that those assets might go down, and the rest followed. Again – I don’t want to condone the behavior.

But it’s different. Luna was a case of mass enthusiasm, excitement, and frankly – marketing and memes – driving people to believe in something which was going to falter according to publicly available information.

That marketing was probably bad. But it wasn’t the same type of bad as Theranos. Similarly, people will now accuse anything that people lose money on of being a Ponzi scheme.

Sometimes there are real Ponzis (e.g. Plus Token). Most bad investments aren’t Ponzi schemes. Some are fraud, some are bad luck, and some are somewhere in between.”

CZ (Binance): “I am very disappointed with how this UST/LUNA incident was handled (or not handled) by the Terra team. We requested their team to restore the network, burn the extra minted LUNA, and recover the UST peg. So far, we have not gotten any positive response, or much response at all.”

Fintwit: “If you invested $10,000 in LUNA last week, you now have $2.” “In a recent interview, Do Kwon said: ‘95% of coins are going to die, but there’s also entertainment in watching them die too.’ One week later, LUNA collapsed to $0.”

Caetano Manfrini: “Today’s attack on Terra-LUNA-UST was deliberate and coordinated. Massive 285M UST dump on Curve and Binance by a single player followed by massive shorts on LUNA and hundreds of Twitter posts. Pure staging. The project is bothering someone. On the right path!”

KSI: “My 3 million dollars’ worth of LUNA is now worth a few $100.”

Matt Novak: “If you invested $100 in LUNA one month ago, the fourth most popular cryptocurrency at the time, you now have $0.04.”

Peter Schiff: “Terra #LUNA provides a perfect example of why you shouldn’t always ‘buy the dip.’ Yesterday Luna was down 98%. If you bought that dip thinking the crash created a great buying opportunity, you lost 99.3% today. This can happen to any crypto.”

Luke Martin: “LUNA is the first coin in history to go to zero and then 100x, all within a week. WTF.”

Chainlinkgod.eth: “Rather than calling people poor and dunking on them, you could have properly explained the death spiral risks around UST to the retail investors who trusted you and simply wanted a safe source of stability and yield to combat inflation. The market humbles all.”

DeFifrog1:

“Nice job holding all of crypto hostage with your Napoleon complex and causing the destruction of tens of thousands of lives. Impressive levels of narcissism really.”

“Make $5b have only one week on twitter harassment and some neet comes to your apartment then leaves. Seems pretty good trade off.”

Cantering Clark: “I didn’t invest in Luna or UST, so I don’t have a “capital” dog in this fight… That being said – You are just arrogant egotistical compensating boy, who unfortunately while being served a slice of humble pie ended up causing a ton of collateral damage.”

Devchart: “You freaking egotistical troglodyte told people to hold steady giving them hope that a fix was coming while the price kept nuking and went radio silence afterwards. The joy I had watching your project crash is nothing compared to the joy your members will have when they sue you.”

Bill Ackman:

“When I read about the ‘algorithm’ of @terra_money it sounds just like a crypto version of a pyramid scheme. Investors were promised 20% returns backed by a token whose value is derived only by demand from new investors in the token. There is no fundamental underlying business.”

Luna appreciated by attracting more followers and limiting the supply of tokens through a vesting schedule. It collapsed once the supply of sellers of Luna overwhelmed the buyers.

The digitization of the Luna scheme and the hype about crypto enabled it to achieve enormous scale quickly. Blockchain is a brilliant technology with enormous potential. Schemes like Luna threaten the entire crypto ecosystem.

The crypto industry should self-regulate away other crypto projects with no underlying business models before crippling regulation shuts down the good and the bad. Hyping tokens that are not supported by businesses that create value will destroy the entire crypto industry. Why and/or where am I wrong?”

Do Kwon continues failing?

For reference, Do Kwon had previously founded the failed stablecoin “Basis Cash” (BAC) which emerged on Ethereum in late 2020 – soon before the launch of TerraUSD (UST).

Basis Cash (BAC) sought to maintain a $1 peg through code rather than collateral – but the project never achieved dollar parity – with the token dropping below $1 in early 2021.

Now it seems as though Terra protocol (LUNA/UST) has failed as well… however, some are holding out hope that it pivots and recovers. Whether this is possible, I’m not sure.

Terra Luna Post-Crash Proposals…

Return money to investors from the LFG fund

Persian capital’s recommendation: (R)

Original proposal by “FatMan” on Terra forum. (R)

Context: 256K Anchor wallets; top 1000 Anchor wallets down 82% of all UST; poorest wallet in this top 1000 has 955K UST.

Proposal on official Terra forum: Goal is to make people “whole again” using Terra’s $1.5B fund.

One method: Return 30 cents on each UST invested to every wallet. But this strategy would give a disproportionate amount to rich whales holding most UST at the time of the depeg. And everyone would still only be made 30% whole – most would still be upset.

Alternative: Prioritize smaller wallets. People with a couple thousand or more of UST in Anchor. If Terra focused on the “poorest” 99.6% of wallets, they could make this large group of people 100% whole. (Most wallets are held by non-millionaires).

Benefits of prioritizing smaller wallets: more people 100% refunded; good community sentiment; easier to manage the remaining rich whales; fairer because poor need money more than most.

Note: This “alternative” strategy was utilized following the collapse of Bernie Madoff’s Ponzi scheme such that investors with $1.7M or less received everything back.

Vitalik Buterin (vitalik.eth): “Strongly support this. Coordinated sympathy and relief for the average UST smallholder who got told something dumb about ‘20% interest rates on the US dollar’ by an influencer, personal responsibility and SFYL for the wealthy.”

OxHamZ: “Ideas: Lock TFL tokens on a vest based on TVL targets – no TVL no tokens. Need to prevent chain from just being a dumpiesta w/ appropriate locks and incentives. Create LEO IOU concept to allow UST holders to gain recovery over time.” (R)

Rebuild Terra (LUNA)

Hasu: Hate to give tips to ponzis but I’d just let the peg break down, not burn the treasury trying to support it. Wait until UST supply <> treasury parity, then rebuild as a collateralized stablecoin. (R)

Lionel (@CryptoLionel)

  1. Hardfork to Terra2.
  2. Snapshot all holdings before collapse trigger and provide holders with new LUNA2.
  3. Create better chain with LUNA2 & UST2.
  4. Pool to repay old UST peg.
  5. Build (#BUIDL)

What did the Luna Foundation Guard (LFG) do?

Luna Foundation Guard (LFG), second largest known holder of BTC, liquidated almost its entire reserves last week worth billions in a failed attempt to defend the Terra/UST stablecoin peg.

  • CZ: “Where is all the BTC (Bitcoin) that was supposed to be used as reserves? Shouldn’t those BTC be ALL used to buy back UST first?”

Chain analysis firm Elliptical tracked LFG’s movement of Bitcoin and concluded that they had all been transferred to centralized exchanges: Binance and Gemini – and thereafter was untraceable. (R)

LFG posted an update in a long Twitter thread… (R)

As of Saturday, May 7, 2022, the Luna Foundation Guard held a reserve consisting of the following assets:

  • 80,394 $BTC
  • 39,914 $BNB
  • 26,281,671 $USDT
  • 23,555,590 $USDC
  • 1,973,554 $AVAX
  • 697,344 $UST
  • 1,691,261 $LUNA

Consistent with its non-profit mission & focus on the health of the Terra ecosystem, beginning on May 8, when the price of $UST began to drop substantially below one dollar, the Foundation began converting this reserve to $UST.

The Foundation did so by directly executing on-chain swaps and transferring $BTC to a counterparty to enable them to enter trades with the Foundation in large size & on short notice.

LFG:

  • Directly sold 26,281,671 $USDT & 23,555,590 $USDC for an aggregate 50,200,071 $UST
  • Transferred 52,189 $BTC to trade with a counterparty, net of an excess of 5,313 $BTC that they have returned, for an aggregate 1,515,689,462 $UST

(A) On May 10, when $UST had fallen to $0.75, pursuant to a Master Services Agreement dated January 10, 2022 through which TFL managed & executed all finance, administrative & operational functions & support as requested,

(B) TFL, on behalf of the Foundation, executed the following exchange trades in a last ditch effort to defend the peg:

​​Sold 33,206 $BTC for an aggregate 1,164,018,521 $UST

On May 12, LFG swapped 883,525,674 $UST to 221,021,746 $LUNA & staked this across a range of validators to protect against a possible governance attack as the amount of $LUNA continued to increase.

All transactions described above have now been completed.

As of May 16, 2022, the Foundation’s remaining reserves consist of the following assets:

  • 313 $BTC
  • 39,914 $BNB
  • 1,973,554 $AVAX
  • 1,847,079,725 $UST
  • 222,713,007 $LUNA (of which 221,021,746 is currently staked with validators)

All assets will be returned to wallets tagged in the LFG dashboard shortly – and the LUNA previously staked is unbonding, and will be returned in 20 days. The Foundation is looking to use remaining assets to compensate remaining users of $UST, smallest holders first.

May 21, 2022: Do Kwon states that LFG (Luna Foundation Guard) used all of the Terra Reserves to defend the UST peg.

Aftermath of the Terra LUNA crash…

The Terra (LUNA) collapse happened so fast that many people couldn’t react or didn’t even hear the news until it was too late to react (not everyone sits on Twitter all day checking the latest happenings – some people go outside and hope they can trust crypto not to fail).

Inability to unstake

Some people had LUNA tokens staked and, due to the 24-hour “lock-up” period, they couldn’t unstake while the crash was occurring.

(People who initiated staking around the time of the crash obviously never could’ve fathomed the possibility of an attack.)

Lose-lose situation

Sell UST into an asset on-chain that is dropping heavily (LUNA) and cut losses OR send to an exchange (Binance, Kraken, Coinbase, etc.) where it’s significantly de-pegged.

For this reason, many people didn’t even react – they just held tight and hoped everything would be alright/fixed.

Suicide attempts & completions

It was reported that many people lost a lot of money – and the losses drove some to attempt suicide (some of these attempts were successful).

Example: My friend and ex-colleague (my manager for 15 years) tried to commit suicide this morning. He basically moved all of his savings to crypto in 2021 and LUNA was a massive player in his portfolio.

Example: One of my friends attempted suicide. (Posts suicide note). We were able to save him, but he is in the ICU. He lost $1.2M in LUNA.

Emperor (EmperorBTC): “Reports of 22 people committing suicide over Luna failure. 10s of DM which tell a horrific story. A perfect Ponzi was designed in the name of a stable coin to lure the retail. A blot on crypto that can’t be undone. I hope Do Kwon is prosecuted and pays for it.”

Homeless & bankruptcy

Some individuals have lost so much money in Terra (LUNA) – that they’re unable to afford their mortgage payments, car payments, declared bankruptcy and will end up homeless.

Reddit post: “I lost over 450k USD, I cannot pay the bank. I will lose my home soon. I’ll become homeless. Suicide is the only way out for me.”

Stages of grief (Denial, Anger, Bargaining, Depression, Acceptance)

Many Terra (LUNA) investors were holding out hope that the project was going to somehow bounce back via strategic post-hoc maneuvers from the LFG and Do Kwon, but this never happened.

Some are refusing to believe that Terra (LUNA) is dead, but many have already progressed to the “acceptance” stage of grief.

Reddit post:

“I’m sorry to say this, but it’s over boys. You know when someone has a dear relative that is on life support.

They refuse to believe that their loved one is not gonna make it – even though doctors are telling them that they’re not gonna make it.

Well, that’s an accurate representation of what’s going on with Luna.”

Do Kwon’s wife (emergency protection)

Do Kwon’s wife under emergency protection after Terra (LUNA) crash – likely due to death threats from those who lost a significant amount of money.

South Korean media outlet “MoneyToday” wrote that an unidentified person broke into her apartment building, rang the doorbell to ask if Kwon was home, before leaving the premises after she said he wasn’t.

Kwon’s wife now has been provided with security after she requested emergency protection (this is according to police in Seoul’s Seongdong-gu district).

Stablecoin regulation looming

Crypto-friendly SEC Commissioner Hester Pierce a.k.a. “Crypto Mom” hinted at regulation of stablecoins after the collapse of Terra (LUNA).

Pierce stated that stablecoins are likely the first sector to be regulated following the UST crash.

Even Janet Yellen reacted specifically to the Terra/LUNA crash: “digital assets may present risks to the financial system and increased and coordinated regulatory attention is necessary.”

Crypto market crash

The attack on Terra (LUNA) caused the crypto market as a whole to tank to some extent.

Why? The entire Terra (LUNA) project was effectively “wiped out” and the price of BTC dropped substantially (due to the attack) – which caused the value of altcoins to tank as well.

All of this had broader effects on the entire market (DeFi liquidations & liquidated “longs” on BTC/alts).

Investor confidence in crypto down

Investor confidence in cryptocurrencies is way down… Terra (LUNA) showed that a large (top 10) cryptocurrency project can go “kaput” overnight. Many who were considering crypto may reconsider out of fear that other projects are like Terra (LUNA).

Confidence in DeFi diminishes

The crash of Terra (LUNA) reduced general confidence in DeFi – both for guppies and whales.

Many people are going to be even more skeptical of DeFi as an alternative to conventional banking.

Cosmos indirectly affected (?)

Terra (LUNA) is one of many projects that harnessed Cosmos (ATOM) for its development.

Some may perceive Cosmos as a less trustworthy project as sort of a “guilt-by-association” type phenomenon.

Terra ecosystem development stunted

There were many developers working on projects within the Terra ecosystem. Examples: infrastructure, decentralized exchanges, explorer, payments/onramp, wallet, lending, analytics, staking derivative, launchpads, bridges, stablecoins, NFTs, insurance, DeFi, games, etc.

Dissolving of Terraform Labs in South Korea

Do Kwon shut down Terraform Labs in South Korea days before the LUNA/UST crash and claimed that the shutdown was purely coincidental. According to the Korean Supreme Court filing, all of the company’s holdings were liquidated on April 30, 2022.

Arrest warrant for Do Kwon (Singapore) (R)

A Reddit post alleges that there’s an arrest warrant for Do Kwon in Singapore.

Whether this is legitimate is unknown, but assuming it is legitimate, the specific grounds for arrest remain unclear as cryptocurrency isn’t formally regulated or considered real money most places.

Do Kwon foreshadowing the collapse of Terra/UST in interviews?

Many have pointed out 2 interviews (one from 2021 – and another just 8 days before the UST/Luna crash) that may have foreshadowed the entire collapse almost like Do Kwon: thought this could happen; knew it would happen (such that he planned it or was behind it).

Interview with Alex Botez (8 days prior to Terra/UST crash) (R)

  • Alex Botez: I wonder how many of these companies you think are entering the space just because it’s hot and there’s a lot of fun versus the one’s that will still be here like 2 to 5 years later.”
  • Do Kwon: “95% are gonna to die, but there’s also entertainment in watching companies die too.”

Do Kwon Live from New York Interview TeFi Alpha 2021 (R)

Do Kwon: “It’s a cycle of life: you begin from nothing and go back to nothing. That’s exactly where I wanna be. So I think Terra’s gonna be the decentralized money center across the entire blockchain – across all the blockchains. And I’m excited for Terraform Labs to contribute a significant portion of that early vision – but eventually to go back to nothing. Exciting.”

Do Kwon’s Terra (LUNA) recovery plan…

May 16, 2022

“Terra is more than $UST. It has been inspiring to partake in the dynamic discourse regarding the best next steps for Terra. Taking feedback from the community and thoughtful proposals, I would like to suggest the following path forward.”

“Currently these key precepts underpin most schools of thought: (1) the #LUNAtic community is unparalleled in its passion; (2) the builder talent pool is broader and deeper on Terra than most ecosystems; (3) Terra’s blockchain is incredibly robust, as attested to by recent events.”

Terra Ecosystem Revival Plan 2 (Amended & Final) (R)

  1. Create a new Terra chain without the algorithmic stablecoin. The old chain to be called Terra Classic (token Luna Classic – LUNC), and the new chain to be called Terra (token Luna – LUNA)
  2. Luna to be airdropped across Luna Classic stakers, Luna Classic holders, residual UST holders, and essential app developers of Terra Classic.
  3. TFL’s wallet (terra1dp0taj85ruc299rkdvzp4z5pfg6z6swaed74e6) will be removed in the whitelist for the airdrop, making Terra a fully community owned chain
  4. Allocate a large portion of the token distribution in 1) providing emergency runway for existing Terra dapp developers 2) align interest of devs with the long term success of the ecosystem
  5. Network security to be incentivized with token inflation. Target staking rewards of 7% p.a.

May 22, 2022: LUNA price up ~54% in the past 24 hours and reclaimed a ~$1B marketcap.

Closing thoughts on the Terra (LUNA) attack…

Cryptocurrencies remain risky investments. The high IQ analysts generally seem to: (A) avoid projects like Terra (LUNA) altogether (because they’re well-aware of its design flaws) and/or (B) find ways to capitalize (such as via carrying out an attack or strategically shorting).

The devastation and financial ruin resulting from the collapse of Terra (LUNA) was significant – as many individuals perceived the APY rewards for staking UST (~20%) a superior alternative to standard banks (many assumed UST was effectively an untouchable stablecoin).

The attack on Terra (LUNA) was: (A) timed perfectly; (B) brilliant (high IQ); and (C) technically legal. The attack also required a significant amount of upfront capital (as a loan was acquired for 100K BTC).

Hopefully this attack reminds everyone that most (if not all) cryptocurrency projects are not “too big to fail” and that nobody should invest more than they can afford to lose completely – especially in newer/less established altcoins.

Moreover, it’s always smart to be more skeptical of any project that’s offering something that seems “too good to be true.” Getting ~20% APY on a “stablecoin” clearly had significant risk (despite many claiming and/or believing it didn’t).

Many were unaware of where the 20% APY for UST was coming from… and the old adage goes: if you don’t know where the yield is coming from – you’re the yield (or might eventually become the yield).

Clearly there were design flaws with the Terra (LUNA) protocol – as many individuals (most notably Freddie Raynolds) warned of an attack like this ~6 months before it occurred. Other smart investors warned others to steer clear of Terra (LUNA) as well.

According to Jonathan Wu, the dream of algorithmic stablecoins will never die because they: (1) make something from nothing; (2) are ultra-scalable without the need for humans; and (3) have infinite capital efficiency.

It’s only a matter of time before something similar comes along, builds hype, gets users/investment, and then crashes and burns – with the investors left high and dry.

I hope anyone struggling right now because of the Terra (LUNA) crash keeps pushing forward, gets psychological help if necessary, never gives up, and recovers from the sheer madness/chaos that transpired.

R.I.P. O.G. Terra (LUNA) and the #LUNAtics.

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