Terra LUNA and Terra USD crashes have thrown the crypto industry into disarray. Given the horrific way in which the de-pegging of UST occurred, there is a lot of interest to learn what exactly led to the black swan event. Is Terra LUNA just a “poorly designed” failed project or a masterfully constructed crypto heist?
Why Terra LUNA Crash May Have Deeper Roots Than Protocol Failure
Whistleblowers reveal insider deals that led to UST depegging & LUNA Collapse
Several whistleblowers from the Terra community have accused some prominent figures of being behind the crash. These people include the co-founder of Terraform Labs, Do Kwon, the CEO of Jump Crypto, Kanav Kariya, and the CEO of FTX, Sam Bankman-Fried.
“FatMan”, an active member of the LUNA community who is also popular in governance groups, has shared details of how an insider deal triggered the depegging of the UST stablecoin that led to the ultimate collapse of LUNA.
LUNA and UST have lost most of their value, and according to FatMan, the loss was caused by several insiders. In a Twitter post, the community member said that he had gathered details submitted by whistleblowers. FatMan said that Do Kwon was paying Jump Capital a fixed amount of LUNA tokens each month to pay off a debt. He hinted that the monthly payout was worth millions.
FatMan also tagged Bankman-Fried in the thread, saying he knew about a “$30% Serum handshake with Jump.” He also said he had more details about Jump Crypto bailing out the Solana Wormhole bridge exploited for $320 million. Jump Crypto deposited 120,000 Ether tokens to Wormhole and replenished the supply following the exploit.
According to FatMan’s tweets, the rescue of the Wormhole bridge by Jump Crypto was deeper, saying there was a secret deal between the CEO of FTX and Kanav Kariya. So far FatMan has yet to provide any evidence of this.
FatMan also revealed details of the level of centralization within the Terra ecosystem. A source within the Luna Foundation Guard said the council voted two times amid the UST crisis. $750 million worth of Bitcoin and an additional 30,000 BTC from the UST reserves were used to reestablish the UST peg. However, the remaining funds were transferred to Terraform Labs without involving the council.
The source said that the transfer of the funds was not made after a council vote, which created a sense of centralization. Do Kwon failed to conduct a proper vote before taking out Bitcoin from the UST reserves.
Seven big players withdrew $2 Billion UST from Anchor during the same period of time, which triggered the de-pegging
A blockchain analytics company Nansen used the information on the blockchain ledger to determine the series of events related to the de-pegging. Analysis showed that seven big players were likely to have triggered the de-pegging of UST.
An analysis by the blockchain analytics company Nansen suggested that the outbreak of chaos began at the decentralized exchange protocol Curve. Token liquidity providers have an incentive to maintain the price of tokens by balancing their supply with those of other, similarly priced tokens. UST-3pool was one such liquidity pool that allowed UST to be swapped for USDC, DAI, or USDT.
In the chart below, we can see the UST flows in and out of aggregated Curve pools. We can observe that from May 7 to May 9, there are many spikes in the flow volumes in and out of Curve. For a stablecoin, this is a very rare event. Although liquidity pools generally do their best to keep the price pegged, there is the possibility of huge withdrawals and inflows temporarily causing the token price to fluctuate.
Using on-chain data, Nansen pinpointed seven big players who might have triggered the de-pegging as they launched the offensive on Curve by swapping UST for other stablecoins. While several heavy DEX traders and token millionaires were involved in the sell-off, one name that stands out on the list is Celsius, a major crypto lending platform that accounts for over 10% of the total flow volumes of UST on May 7 and 8.
These addresses had first withdrawn UST from Anchor. Anchor is Terra’s lending product that offered yields of close to 20%. The reason it provided high yields was so that users don’t withdraw funds. However, the top 7 addresses relentlessly withdrew from May 7 to May 9. They then sent them to Ethereum through a multi-chain bridge, Wormhole, and then swapped them for other stablecoins on Curve.
Meanwhile, the Luna Foundation Guard, a Terra-affiliated organization was trying to defend UST’s peg. It tried to counteract by withdrawing about 339.6 million UST tokens from Curve on May 7 and 8 and adding other stablecoins back to the Curve pool. However, the attempts were in vain as the top addresses transferred 2 billion UST tokens during the same period.
While this happened, UST’s price had remained off its peg for a long time. This proved to be the final nail in the coffin for UST as arbitrage traders latched onto the opportunities across different centralized exchanges and began selling UST. Around 165 million UST were sent to CEXes on May 10, as a result of which UST never returned to its original peg.
Do Kwon is one of the pseudonymous co-founders of another failed algorithmic stablecoin Basis Cash(BAC)
According to sources, Do Kwon, CEO of Terra creator Terraform Labs, is one of the pseudonymous co-founders of the algorithmic stablecoin Basis Cash(BAC).
But it failed: The token of this long-abandoned project never achieved its target of dollar parity, sank below $1 in early 2021 and was trading well below 1 cent. Now history appears to be repeating itself: UST fell precipitously below its peg in three days, dropping as low as 27 cents.
Former Terraform Labs engineer Hyungsuk Kang said Basis Cash was a side project by some of Terra’s early developers, including himself and Kwon. Kang eventually left TFL to build a Terra competitor called Standard Protocol.
“Basis Cash wasn’t tested at the moment, and we weren’t even sure” it would work, Kang said. Kwon “wanted to just test it out. He said that this was a pilot project for doing that.”
On condition of anonymity, another Basis Cash developer confirmed Do Kwon and TFL employees were behind the project.
Both Kang and the anonymous employee cited that Kwon was “Rick Sanchez,” the pseudonymous co-founder. Internal “Basis Cash Korea (BCK)” chat logs reveal Kwon alluding to himself as “Rick.”
(Kwon and his Basis Cash co-founder “Morty” borrowed their pseudonyms from the popular animated TV show “Rick and Morty.”)
Basis Cash never reached the heights of other Kwon-linked crypto projects. Its total value locked (TVL) briefly peaked at $174 million in February 2021, two orders of magnitude below Terra’s $30 billion TVL before the historic sell-off.
Basis Cash never found its footing. Game theory and smart contracts were supposed to regulate BAC’s supply to keep it trading at the price of $1, but the token never managed to hold on to its dollar peg.
Basis Cash and its promise of an algorithmic stablecoin predated crypto Rick and Morty.
An anonymous team of developers – mostly employees of Terraform Labs – modeled Basis Cash after an earlier project called Basis (formerly known as Basecoin).
Basis, an erstwhile venture capital darling, raised $133 million before shutting its doors in 2018 over regulatory concerns. Founder Nader Al-Naji then said that “there would be no way” for Basis’s peg maintenance tokens to avoid securities designations; he shuttered the project rather than fight it out in court.
Apparently intrigued by the early ideas behind Basis, Do Kwon directed a select group of TFL employees to resurrect what eventually became Basis Cash, Kang and another early TFL engineer say. The Korea-based project was envisioned as a way to test out the core concepts of the original Basis without falling prey to U.S. regulatory pitfalls.
According to sources, Kwon deliberately distanced himself from the day-to-day operations of the project, though he proposed most of the core ideas behind Basis Cash and its underlying token model. Analogous to UST, which relies on a token-burn mechanic involving its sister coin LUNA, BAC relies on a bonding mechanism to maintain its $1 peg.
On its website, Basis Cash describes itself as a “Decentralized Stablecoin with an Algorithmic Central Bank,” and in a November 2020 interview, “Rick” shared a vision for Basis Cash similar to that for UST.
“In the long term, we look forward to seeing Basis Cash be used widely as a base layer primitive such that there is organic demand for the asset in many DeFi and commercial settings,” he said over Telegram at the time.
Some Argue That Terra (LUNA) Was Just A Failed Project
One of the proponents of this theory is Tether (USDT) and Bitfinex chief technology officer Paolo Ardoino, who said that the Terra (LUNA) project was not intended to be a rug pull, but was simply “poorly designed.”
Ardoino made the comments during an appearance on the Reimagine Unplugged podcast, from Reimagine, a media company that focuses on Web3 content and events. The chief technology officer stated that a big problem was with Kwon’s misguided sense of self belief:
“I don’t know Do Kwon. But let’s give him the benefit of the doubt. He created this project with arrogance and with thinking that he was right and many were supporting him, of course, probably for economic reasons, but was not per se, a rug pull, it was a project that was poorly designed as many projects are poorly designed.”
“That there was like a castle of cards and it could fall down, but of course he couldn’t say it, because otherwise it would have fallen down much faster. And again, it was clear to me, it was clear to many that I know that it was a bad idea,” he added.
Ardoino went on to state that UST had become too big to maintain its peg, as its collateralization, primarily in Bitcoin (BTC) at the time as it attempted to build its reserves, was not large enough to support the stablecoin but was still “big enough to crash the market even further.”
“They were basically in a cascade situation where they had to defend the peg so they have to sell the collateral and selling the collateral was causing additional crashes and these additional crashes were pushing them to sell more or collateral and so on and so forth,” he said.
I’m not sure about you, but I think that there is more to the Terra LUNA Crash story than just a failed project. There are too many “coincidences” that appear to be coordinated. Terra ecosystem was prone to centralized manipulation due to its lack of decentralization. Moreover, Kwon’s biography leaves many questions unanswered.