Crypto

Breach: Moon crash could have been intentional, here’s why | Cryptocurrency

Following the Luna cryptocurrency and the UST stablecoin, both of which are linked to the Terra blockchain, the cryptocurrency market has collapsed and is struggling to recover, with some even predicting the collapse of the entire cryptocurrency market.

That’s what happened

The Luna Foundation Guard (LFG), a non-profit dedicated to keeping TerraUSD’s value stable, has been accumulating large crypto reserves to support the peg, including over 80,394 BTC. However, unlike USDT, TerraUSD was not backed by any traditional assets such as cash, treasury bills, or other assets. The supposed stability of its value was determined by the algorithms that linked it to the Moon.

Meanwhile, Terraform Labs has raised more than $200 million from companies like Lightspeed Venture Partners and Galaxy Digital to fund LUNA projects, despite critics’ doubts about the technology.

As Luna’s total value topped $40 billion, individual traders and wealthy investors went wild.

The price of the LUNA token plummeted when the Terra Luna UST stablecoin, backed by LUNA tokens and billions of bitcoins, exited the US dollar on May 7. After the TerraUSD crash, LFG spent most of its bitcoin supporting it, but nothing worked.

On May 13, UST dropped to an all-time low of $0.04495199 and set off a death spiral for its sister token, Luna. The Terra blockchain has been stopped.

Some find this disturbing, recalling the trigger of the 2008 financial crisis, the collapse of Lehman Brothers. Stablecoins are designed to maintain a 1-1 peg to the dollar and remain sheltered from volatility, but the UST has weakened and pulled back from $1, causing its holders to lose billions of dollars. The owners of LUNA and UST lost $40 billion together, a classic case of the cryptocurrency hype becoming a reality.

Even Binance founder Changpeng Zhao fell for the trap, joking that he was “poor again” after the exchange’s investment in Luna fell to $2,200 from $1.6 billion. In the eyes of retail investors, this was no joke, as some people who had invested in Luna or TerraUSD were genuinely desperate and shared lists of suicide hotlines.

There’s something wrong with this

It all started on May 7 when some large investors sold $500 million worth of UST on Anchor, the savings protocol that serves as the largest UST sink.

Although LUNA began to fall heavily, Terra at that time brought back the anxiety.

After UST began to fall in value on May 9, LFG decided to sell bitcoin and start buying UST to restore the dollar peg, but this decision led to another decrease in stocks, and LUNA entered a death spiral. LFG’s reserves were emptied of bitcoin addresses the next day.

Source: Bitinfocharts.com

The situation was more like selling your cows to buy cliff jumping sheep, so you are left with dead sheep. Wouldn’t it make more sense to keep BTC and use it to pay back the community, or start over with it?

Another unanswered question: why was there no locking mechanism. The moon’s supply jumped to over 6.5 trillion during its death spiral. They just kept hitting him until the end.

No central bank, no matter how desperate, issues too much money. Imagine that today the Federal Reserve is printing trillions of dollars to help the US economy. This was completely irresponsible on Terra’s part.

Where is LFG BTC now?

The collapse of the Terra UST stablecoin raised questions about what exactly happened to the bitcoins held in the LFG reserve to prevent just such a situation from occurring. Did Terra really sell BTC to protect the UST peg?

Elliptic blockchain analytics tools tracked the movement of UST reserves after its collapse.

On May 9, LFG announced it would lend $750 million worth of BTC to over-the-counter trading firms to protect the UST peg, with Terra co-founder Do Kwon later clarifying that Bitcoin would be traded.

On the same day, 22,189 BTC, worth about $750 million at the time, were transferred from one LFG-associated Bitcoin address to another. The same address then received 30,000 BTC worth about $930 million from other LFG wallets. A few hours later, these 52,189 BTC were transferred to a single account on the Gemini cryptocurrency exchange through several bitcoin transactions. According to Elliptic, the assets cannot be traced or determined if they were sold to support the UST price.

Diagram

Source: Elliptic.com

As a result, 28,205 BTC remained in Terra’s reserves, which were transferred to Binance in one transaction on May 10th. Submitting assets to an exchange does not guarantee that they have been exchanged for other assets, so there is no way to know if these bitcoins were traded for UST or simply left in an unknown direction.

Diagram

Source: Elliptic.com

Elliptic’s final conclusion is that those seeking compensation for losses incurred as a result of UST exposure may be interested in determining whether these bitcoins will remain on these exchanges.

Panic in the market made someone rich

The shock wave hit the cryptocurrency market with the collapse of the UST, creating a real mess. The market was in a state of extreme fear with even the most optimistic analysts wondering if the cryptocurrency was really doomed.

Following the depegging of UST, the world’s largest stablecoin Tether (USDT) deviated slightly from its dollar peg, causing huge concern. However, he quickly recovered, calming everyone’s nerves.

In this mess, the wealthiest bitcoin wallets have been hoarding the flagship cryptocurrency when its price was low.

According to the NYT, the collapse of UST and Luna hurt retail traders, but not investment firms, which got cash early and made huge profits.

In a frantic race to find out why UST and LUNA died, ADA founder Charles Hoskinson claims that Blackrock and Citadel borrowed 100,000 bitcoins from Gemini, exchanged 25% for UST, then dumped the BTC and bought it back at a low price, pocketing the difference.

Diagram

Source

However, these allegations were denied by all parties involved. There was even a press release from BlackRock saying that they were not involved in the LUNA and UST accidents. Charles Hoskinson later deleted the tweet.

What is the future of Terra?

Many think the story of the moon is over, but Terraform Labs CEO Do Kwon has submitted a governance proposal asking community members whether to stop issuing the UST stablecoin and create a new blockchain instead.

According to Kwon’s plan, the new Terra blockchain will be split into two parts. Two strings will work at the same time, but each of them will work differently.

Meanwhile, Mike Novogratz, CEO of billionaire investor Galaxy Digital, who has been a strong supporter of Terra, said in a public letter that Galaxy invested in Luna back in 2020 because it had “significant upside potential.” be “a great idea that failed”. »

So it seems more likely that investor respect cannot be restored and Luna is indeed done for, despite Do Kwon’s attempts to save face.

At the end of the line

Although there is no direct evidence of who was responsible for the accident and whether it was in fact intentional, it is clear that at the time of the incident, someone committed a murder, and ordinary traders and retail investors suffered extremely serious losses.

Meanwhile, the value of bitcoin has rebounded and is trading around $30,294 at the time of writing, so it is a relief that the crypto market and bitcoin are here to stay. We should learn from this case not to invest more than we can afford to lose, not to blindly believe even in solid projects, and to think carefully before making important investment decisions.

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