Terra is the second-largest TVL ecosystem in crypto. With a market capitalization of up to $33B and owning Stablecoin-UST ranked 3rd in terms of capitalization. Most of the locked assets are in Anchor on Terra, with over 14 billion UST deposited for profit. In addition, other projects are on track. However, a “black swan” event happened to this large ecosystem and caused the Terra network to collapse in just one week completely. Join me to find out what happened and the reason behind this collapse.

A. Pre-Attack

November 26, 2021

LUNA & UST attack scenario.

In November 2021, a Twitter account named Freddie Raynolds outlined a way to attack the existing model of the UST with a capital of $1B to warn that the Terra network could be hacked and collapsed.
I will specifically explain how to attack as follows:

• First, the attacker will long $100M of $LUNA
• Step 2: This guy will buy $100k worth of $LUNA on the exchange, then withdraw from the exchange and exchange to UST on Terra Station using the Terra Seigniorage mechanism. He will repeat this about 10,000 times. The fee for each swap is 0.5%. The attacker will accumulate about $500M in the amount of $502.5M. At this point, net profit would be negative $2.5M.
• Step 3: The attacker will close his long position at step 1. Since there is already $500M worth of LUNA on the market bought in step 2. Reduced supply reduces selling pressure for $LUNA, pushing up $LUNA’s price. Therefore, his long position will be profitable. It is possible to estimate a profit of 30%, which equates to $30M. At this point, the estimated net profit will be about $27.5M.
• Step 4: The attacker will deposit $200K worth of bETH into the Anchor protocol and borrow 100M $UST.
• Step 5: He will short $100M of $LUNA.
• Step 6: He will use 500M $UST in step 2 and convert 100 $UST into $LUNA on Terra station and sell it on the market. The fee for the entire conversion process will be around $3M.
• Finally, he will close his short position. Since $600M of $LUNA has been sold on the market, the supply of $LUNA has increased. This leads to a decrease in the price of $LUNA. That’s why his short position is profitable. It is possible to estimate a profit of about 30% or $30M. The net profit of the whole process above will be $54.5M.

Repeating the above process, coupled with the community sell-off effect, will cause $UST and $LUNA to drop in price, and the Terra network will collapse.

https://twitter.com/FreddieRaynolds/status/1463960623402913797

However, this idea was rejected by Do Kwon as stupid.

https://twitter.com/stablekwon/status/1464897977793728514

April 13th, 2022

Luna Foundation Guard has increased its holdings by about 2,508.9 BTC

Luna Foundation Guard added 2500 $BTC as the world’s largest cryptocurrency suffered a drop. Bringing the platform’s total holdings to 42,406.92 $BTC. This amount of BTC is intended as a reserve to support the price of $UST.

More information: Click here

May 6th, 2022

Luna Foundation Guard has bought an additional $1,5 billion of $BTC

Luna Foundation Guard was able to purchase 37,863 BTC through an over-the-counter swap with broker Genesis Trading and further buyback from Three Arrows Capital, a major crypto venture capital firm, thanks to funding. According to the company, the deal involves a $1 billion over-the-counter swap with Genesis taking $1 billion in UST and $500 million worth of BTC purchases from Three Arrows Capital. After the event, Terra’s BTC reserves were around $4B, bringing it closer to its goal of owning $10 billion in stablecoin reserves.

More information: Click here

B. The Attack – The First Domino to fall

May 7th, 2022

• $LUNA Price: $73.05
• $UST: $1.00

UST was withdrawn from the Anchor Protocol

A large amount of UST was withdrawn from the Anchor Protocol.

May 8th, 2022

• $LUNA Price: $80.05
• $UST: $0.99

UST was sold off on UST-3pool

UST was sold off on UST-3pool with about 285 million UST sold on Binance and Curve. This is a liquidity pool on Curve Finance.

Not stopping, when 3pool almost recovered at the end of 8/5, UST was once again discharged. This time resulted in the UST rate skyrocketing to around 65%. The peak of the attack was the UST rate, which was up to more than 80%.

May 9th, 2022

• $LUNA Price: $67.10
• $UST: $0.99

LFG Council has voted to help UST

BTC drops to the $33,000, LUNA drops 17%, and UST loses its peg at $0.98

Luna Foundation Guard used $BTC in reserves to help get UST back to the peg. Following:

• Loan $750M worth of BTC to OTC trading firms to help protect the UST peg.
• Loan 750M $UST to accumulate BTC as market conditions normalize.

https://twitter.com/LFG_org/status/1523512201088143360

May 10th, 2022

• $LUNA Price: $53.60
• $UST: $0.93

UST plummeted to $0.6.

$LUNA’s 10 billion capitalizations have been wiped out (down from 21B to $11B). $9 billion of TVL was also withdrawn from the Terra ecosystem (From $17B to $8B).

UST had been de-pegged from USDT, and UST briefly dropped to $0.74.

C. The Death Spiral has begun

May 11th, 2022

• $LUNA Price: $30
• $UST: $0.47

LUNA Is being delisted by many Korean Exchanges

Many Korean Exchanges delisted and warned investors about $LUNA 

More information: Click here

Increase estimated minting capacity to $1200M to help UST

After throwing all the reserves to pull the price of UST back to Peg but no change. Terra has accepted sacrificing the price of LUNA to save UST by changing the mechanism to burn UST and mint more LUNA. Specifically: Increase BasePool from 50M to 100M SDR and decrease PoolRecoveryBlock from 36 to 18 Block. This increases mint/burn UST/LUNA capacity from $293M to $1,200M to absorb UST sold. This means that the amount of UST redeemed every day will increase.

After this proposal was approved, LUNA was minted a lot, with the total amount minted on 11/5/2022 1,190,951,936 $LUNA and the following days. The job made LUNA’s price plummet from $30 to just $0.01 within 3 days.

More information: Click here

May 12th, 2022

• $LUNA Price: $2.23
• $UST: $0.66

Burn The Remaining UST in the Community Pool

After proposing 1164 to change the mint/burn LUNA/UST parameters, Terra proposed the new proposal as proposal 1188, with the main idea of burning the remaining UST in the Community Pool and withdrawing all USTs in other ecosystems. At the same time, Terra will stake 240M $LUNA to protect the network from an oracle attack. If this proposal is passed, UST will be removed from the supply by about 11%. This relieves some of the selling pressure on UST.

However, before the proposal was approved, the UST completely collapsed.

More information: Click here

Terra blockchain was halted

In the evening of 11:00 pm on May 12, 2022, the validators on the Terra network decided to pause the blockchain at block number 7,603,700 to prevent cases of administrative attacks after the LUNA token was severely inflated.

https://twitter.com/terra_money/status/1524785058296778752?s=21&t=fqPs657qnGWHp75cFphGsQ

Binance Futures delists LUNA tokens in Margin.

Binance Futures delists LUNA tokens in Margin. Specifically, the Binance exchange decided to stop supporting LUNA tokens in futures contracts at 15:30 UTC on May 12, 2022.

https://twitter.com/binance/status/1524622538348716032?s=20&t=95ByYQZTvYMq67YAWY061A

May 13th, 2022

• $LUNA Price: $0.0000008
• $UST: $0.15

Binance delisted LUNA & UST trading pairs

After stopping Margin trading, the price of LUNA continues to decrease. Binance has decided to delist LUNA trading pairs on the exchange when the price is below $0.005 starting at 07:50 UTC on May 13, 2022.

More information: Click here

Terra Ecosystem Revival Plan

All efforts to save LUNA and UST were almost dissipated. Do Kwon proposed a new idea to “reinvent” the Terra network. Specifically:

The total token supply will be reset at 1 billion LUNA, split as follows:

• 400 million (40%) to Luna holders prior to the first draw on May 8, excluding Terraform Labs.
• 400 million (40%) to UST holders pro-rata at time of new network upgrade. UST holders should be compensated as much as possible.
• 100 million (10%) to Luna holders at the last moment when the blockchain goes offline – those who buy LUNA at the last minute marginal price will be rewarded for their role in trying to provide network stability.
• 100 million (10%) to Community Pool to fund future development.
• All LUNA not 10% to token holders at the time of chain must be staked at the time of new network launch.

Recommend a 7% inflation rate to protect the network.

More information: Click here

Binance resumed spot trading for LUNA & UST

See the Terra community’s efforts to restore the network. At 9 PM on May 13, 2022, Binance decided to relist as LUNA and UST. Specifically, with two trading pairs, LUNA/BUSD and UST/BUSD

https://twitter.com/binance/status/1525113628139061248

May 14th, 2022

• $LUNA Price: $0.000091
• $UST: $0.12

LUNA’s circulating supply hits a record high

The official circulating supply of $LUNA inflated to 6.5 trillion tokens.

May 15th, 2022

• $LUNA Price: $0.00017
• $UST: $0.139

The price of $LUNA keeps falling

May 16th, 2022

• $LUNA Price: $0.00012
• $UST: $0.06

LFG reveals how they saved UST

On the afternoon of May 16, LFG first revealed the status of its reserve fund on Twitter, as well as the process of burning billions of dollars to save the collapse of the UST, and the failure of efforts. that force.

LFG said it transferred over 50,000 $BTC “to trade with a counterparty” on May 8, as the price of UST initially started to drop.

and on May 10, LFG said another 30,000 BTC from its reserves was sold off by Terraform Labs (TFL), the original company behind Terra, “in a last-ditch effort to protect 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.

https://twitter.com/LFG_org/status/1526126708193054721

D. Efforts to rebuild the Terra Network

May 17th, 2022

• $LUNA Price: $0.00016
• $UST: $0.08

Terra Ecosystem Revival Plan 2

Despite the advice from CZ that the fork chain is worthless, Terra decided to create a new chain. The new chain will be Terra (administration token is $LUNA) without the algorithmic stablecoin; the old chain is Terra Classic (administration token is $LUNC). Of which, the new $ 1 billion LUNA will be divided as follows:

• 25% for Community Pool
• 20% for Post-attack UST holders
• 35% for Pre-attack LUNA holders
• 10% for Pre-attack aUST holders
• 10% for Post-attack LUNA holders

More information: Click here

Verdict

The past week, especially the time from May 10 onwards, has put the Terra network on alert. With a complete peg loss of $UST and $LUNA the discount does not brake. Set a warning for the algorithmic stablecoin model of other networks like cUSD (Celo), USDD (Tron) or Near’s USN.

The great dependence on the stablecoin UST model is also a “double-edged sword” pushing Terra into the current situation.

Above are all the general facts about the fall of the Terra network. Proposals for a fork chain have also been made. Will users still trust and return to the Terra network?

Let’s wait and see the upcoming situation of the Terra project.

Find more information about Terra

Website: https://www.terra.money/

Whitepaper: https://docs.terra.money/

Twitter: https://twitter.com/terra_money

Telegram: https://t.me/terra_announcements

If you have any questions, comments, suggestions, or ideas about the project, please email ventures@coincu.com.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

Ken. N

Coincu Ventures