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The effect of the collapse of the Terraform Labs project led to a massive panic of investors and the fall of the cryptocurrency market, which is comparable to the consequences of the bankruptcy of Lehman Brothers in the banking sector.
The crypto community is in disarray after two promising Do Kwon Terraform Labs (TFL) projects collapsed at the same time. And while we know in general terms what fueled the “death fall” spiral, many questions, grievances, assumptions, and conspiracy theories remain as to what exactly happened.
Let’s turn to a brief chronology of events. On May 4, 2022, the analytical agency CoinShares published a weekly report in which it reported on the continuing fall of the cryptocurrency market and the outflow of institutional capital from cryptocurrency funds, as a result of which about $ 339 million was withdrawn in four weeks.
On May 5, when the cryptocurrency world was still sleeping peacefully, and the Directorate of Terraform Labs, as it will become obvious later, was preparing for the upcoming events, the reserve fund of the Luna Foundation Guard (LFG) project acquired BTC for $ 1.5 billion. Earlier, the CEO of Terraform Labs (TFL) Do Kwon repeatedly mentioned that Terra plans to bring the volume of BTC to $ 10 billion, which will ensure the stability of the UST rate.
In the same period, macro strategist Lyn Alden expressed concern that against the background of a falling market, the active accumulation of LFG bitcoins could provoke investors to convert UST or LUNA stablecoins into fiat currency for its withdrawal. Alden also noted a high degree of probability of a sharp decline in LUNA, which could force LFG to use BTC reserves to maintain the stability of the UST stablecoin.
Based on her assumptions, Alden concluded that the TFL’s claimed return of 19.5% on the Anchor Protocol (ANC) savings project is unattainable. Especially in conditions when the main driver of demand for UST is artificially high profitability, Anchor will disappear, which will lead to a mass withdrawal of investors’ funds in an unstable market.
On May 10, the cryptocurrency community was confronted with the fact that the third largest stablecoin TerraUSD (UST) by capitalization lost its peg to the US dollar – at the moment, the UST rate fell to $ 0.61. As Alden predicted, the LFG fund, in an attempt to support the UST rate, sold a significant amount of collateral in BTC, but this only brought down the LUNA rate by 64%. The co-founder of the Terra project, Do Kwon, appealed to clients on Twitter with a request not to panic and the statement about the imminent stabilization of the situation.
On May 11, the collapse of the Terra project occurred. The rate of the previously popular stablecoin UST fell to $ 0.34, and the rate of the LUNA coin, which acted as a UST collateral, collapsed from $ 115 to $ 5. On May 13, the Seongdong Police Station in Seoul received a statement that an unknown person had illegally entered the territory of Do Kwon’s home the day before and demanded an immediate meeting with him. His wife told police that the location of their private residence was kept secret and asked the police for personal protection.
On May 14, Do Kwon addressed the cryptocurrency community on Twitter, stating that the collapse of UST and LUNA rates “broke his heart.” The co-founder of Terraform Labs claimed that neither he nor the companies associated with him profited from the incident.
“Undergraduate or serial fraudster?”
The future co-founder of Terraform Labs Do Kwon (Do Kwon) was born on September 6, 1991 in Seoul. While studying at Stanford University, he worked as an engineer for three months at Apple, and then for the same amount of time at Microsoft.
In 2016, Kwon founded his own telecommunications company Anafi, where he was its director until 2017. In January 2018, Kwon partnered with Daniel Shin to co-found Terraform Labs and become the company’s CEO. According to former Employees of Terra, Do Kwon was the founder of another failed algorithmic stablecoin project – Basis Cash (BAC).
The launch of Basis Cash on the Ethereum blockchain took place in late 2020, shortly before the launch of the UST. To create the Basis Cash project, an anonymous team of developers was formed, where the main backbone was made up of Terraform Labs employees. The team modeled Basis Cash on an earlier but also unsuccessful Basis project known as Basecoin. Its founder Nader Al-Naji (Nader Al-Naji) became the object of attention of the US Securities and Exchange Commission (SEC) after raising $ 140 million from investors. The SEC brought charges of violating the securities law, the Basis project was closed, and Al-Naji was forced to return money to investors.
The Basis Cash project is one of the first algorithmic stablecoins tested in real conditions, but also like Terra, which did not retain dollar support. For Do Kwon, it was the first attempt to circumvent the requirements of regulatory authorities, in particular, the SEC.
«Lehman Brothers of crypto»
The panic on the part of investors, caused by the fact that the collapse of the Terraform Lab project occurs according to the most negative scenario, gave rise to some experts to call this situation “Lehman Brothers of crypto”. Thus, they drew an analogy between the current situation with the TFL and the crisis in the banking sector caused by the bankruptcy of the largest financial institution. Thus, the value of the algorithmic ust stablecoin fell by almost 100 times, it lost its peg to the US dollar, and the ust market capitalization fell by $ 16.6 billion, which led to investor panic and delisting of the asset on a number of cryptocurrency exchanges.
“I admit that in the whole situation there may be elements of the human factor, but if you abstract, then basically the same thing happens as with Bear Stearns or Lehman Brothers. They allowed lehman’s situation for cryptocurrency. And now, since the situation is developing without the participation of the US Federal Reserve System, we will see how the rest of the system will last in the near future, “said Mark Carnegie, founder of the MHC Digital Asset Fund.
Errors in calculations or the “giant Ponzi scheme”
There are two types of stablecoins – algorithmic stablecoins and stablecoins backed by an underlying asset such as gold or the US dollar. UST refers to algorithmic stablecoins. Initially, the UST stablecoin is not backed by US dollars and depends on the value of BTC and LUNA, which it uses as its reserves.
The model assumed the use of a system with two crypto assets, in which one must remain stable (UST), and the other (LUNA) is designed to absorb volatility. At the same time, as an incentive for investment interest, it was proposed to deposit UST in the Anchor Protocol savings project, where investors were guaranteed a return of at least 19%, which was paid from Terra reserves. It was this fact that caused the fears of critics, who saw in the UST model either the high expectations of the project manager, or a pre-planned “giant Ponzi scheme”.
“Malicious intent”
As it became known to The Straits Times, despite the fact that TerraForm Labs was officially registered in Singapore, it did not apply for a license under the Payment Services Act. Also, the TFL was not a notified person, which means that it was not granted an exemption from compulsory licensing of activities in the Monetary Authority of Singapore (MAS). This can confirm the version that, like Basis, the TerraForm Labs project could exist only before the first serious claims from regulatory authorities arrived. But, unlike Basis, no one was going to return funds to investors.
An additional reason for suspicion is the fact that by the decision of the general meeting of shareholders held on April 30, 2022, the Korean division of Terraform Labs was liquidated. The liquidation decision took effect on May 4, just days before the collapse of UST and Luna. According to the record of the corporate register, the liquidator is the CEO Do Kwon.
“Attack of the followers of Soros”
Crypto marketer and blockchain expert under the nickname Onchain Wizard posted on Twitter his own theory suggesting that the problems of TerraForm Labs could actually be the result of a secret attack by the Terra project. Roughly in the style of George Soros, who in 1992 made a bet against the British pound, then led a group of traders and collapsed the UK currency system, profiting from English taxpayers.
Onchain Wizard’s point of view is supported by crypto enthusiast @napgener, who accused the American hedge fund Citadel and the investment company BlackRock of borrowing 100,000 BTC from the Gemini cryptocurrency exchange, exchanging them for UST, and then simultaneously dumping all USTs, which dropped the market.
A possible blackRock and Citadel vs Terra attack pattern could look like this. In the run-up to the attack, BlackRock and Citadel converted 25,000 BTC from borrowed funds into UST. Next, they received Kwon’s consent to buy out another large block in BTC at a discount for UST. The transfer of a significant amount of UST instantly reduced the liquidity of the stablecoin.
Then the organizers of the attack dropped the rest of the BTC and all ust, which caused a massive slippage and forced closure of the positions of both assets. The resulting panic among investors, a massive sale of assets, in particular LUNA, as well as forced withdrawals from the Anchor Protocol (ANC), led to the destruction of the market and the loss of the UST’s peg to the US dollar. As a result, BlackRock and Citadel were able to cheaply buy btc, repay the loan and earn on the difference.
Cryptocurrency giants Gemini, BlackRock and Citadel deny rumors about their involvement in trading operations that provoked a weakening of the UST stablecoin’s peg to the US dollar.
Possible consequences
AirTree Ventures partner John Henderson believes that the collapse of the UST was a setback for DeFi, but not an existential crisis for the entire crypto sector. In his opinion, “in the future, many will fail, and people will lose money again, as this is a history of innovation, experimentation and markets.” The UST was one of the next experimental projects with a stablecoin at an early stage, and although its collapse is widely felt, it was a predictable phenomenon in an emerging market, Henderson said.
HEX founder Richard Heart believes that the problem with Terra is centralized decision-making. Do Kwon, says Hart, only successfully bought bitcoins and does not understand what market cycles are. Hart and Henderson’s views are shared by King River Capital co-founder Chris Barter. According to the expert, the cryptocurrency market follows the patterns observed in traditional investment areas.
“Crypto market cycles regularly show pullbacks of 50% to 85%. That’s the nature of this asset class, and we’ve seen numerous questionable projects come down to zero before,” he said.
The effect of Terra’s fall in recent days has spread to other stablecoins, including Tether, the largest stablecoin with a market capitalization of about $ 81 billion.
Who’s next in line?
Investors have long wondered what reserves Tether has to back its peg to the U.S. dollar. As a result, amid fears of a collapse of Tether due to the fall of LUNA and UST, the USDT stablecoin is trading at $0.99.
The developers of the Tether stablecoin assured traders of the reliability of USDT and warned about speculators trying to make money on the manipulation of opinions. Representatives of Tether announced that they are going to move stablecoins for more than $ 1 billion from the Tron blockchain to Ethereum, as well as $ 20 million to Avalanche.
Tron founder Justin Sun announced the creation of a reserve of $ 2 billion to protect TRX from the growth of short positions.
“The rate of financing short positions on Binance exceeds 100% per annum. It seems that TRX is the next target after LUNA and Tron will send $ 2 billion to fight them, “he wrote on Twitter.
Sun added that during market turbulence, the U.S. dollar remains the most stable. TRX now has a total capitalization of $270 million, and the value of TRX DAO Reserve is $10 billion USDD is currently trading at $0.996. The rate of the UST stablecoin at the time of publication is $0.09089, and LUNA coins are $0.0001481.
#stability #bench #days
