Collapse of Luna and UST

David STANCEL

TERRAGEDON

SCAM? PONZI?
Nope.

One of the Greatest Onboarding Tools in Crypto

And Beyond

  • Twitter user @FreddieRaynolds reported back on 25 November 2021 about how a wealthy attacker could not only break @terra_money but profit heavily doing it with a Soros style Black Wednesday attack. Here is a short summary of his observations:

What Happened To $UST? And Some Lessons From My Own Anchor Protocol Journey

How The LUNA/UST Sell-Off Started

  • It all started with a massive sell-off on Curve, where was $85 million UST-to-USDC swap that had the 3-pool slightly out of imbalance.
  • To put the Curve pool back into balance 50,000 $ETH was sold, and another 20,000 $ETH was sent to Binance.
  • Fast-spreading Twitter rumors caused that $2 billion were withdrawn from Anchor and peg was moving between 0.987-0.995. The first peg defense was successful, but peg never fully recovered.
     
  • 4 factors that were in place to make sure that the attackers would succeed:
    • ​The attackers borrowed 100,000 $BTC (from Gemini)
    • The attackers make a $1B $UST deal OTC
    • LFG (Luna Foundation Guard) is buying $BTC in March and April as a defense mechanism to protect the peg
    • The announcement of the switch from the 3-pool to the 4-pool

Source: Nansen.ai

What Happened To $UST? And Some Lessons From My Own Anchor Protocol Journey

How it continued

  • LFG removed $150M UST from the 3-pool on Curve in preparations for the new 4-pool. The attacker uses $350M UST from OTC trade to drain the 3-pool. Peg has drifted into the 0-97-0.98 range
     
  • ​The rumors were spreading quickly and Anchor deposits went down by $10M per minute.
     
  • People were scared. The stock market was down, Bitcoin was down as well. Pure disaster. But that was far from all. The attackers have had $650M $UST left that they’re starting to sell on Binance.
     
  • LFG steps in and sells $BTC to buy $UST to try to restore the peg. $BTC price goes down because of high sell pressure and the attacker was short-selling Bitcoin.
     
  • The death spiral is starting to get momentum. The death spiral effect caused the constant burning of $UST and the issuance of new $LUNA into circullation.
     
  • Traders start to short $LUNA which further tanks the $LUNA-price, and also shorting $UST (this is possible on FTX).
     
  • Then centralized exchanges started to ban $UST withdrawals, and now the panic is in full-mode.
     
  • $BTC-price goes lower because people now are waiting for LFG to sell-off more $BTC
     
  • Eventually LFG understands that this is a race they can’t win and lets the peg bleed. 
  • Nansen´s report reveals that Terra Crash was not caused by a single party hostile
    .
  • The report said that the attack was carried out by a group of seven well-funded wallets within the Terra ecosystem.
     
  • The report also concluded that the UST de-pegging was not carried out by hackers or attackers.


     
  • The seven wallets initially started withdrawing UST liquidity from Anchor
     
  •  Then, they started to move the liquidity to Ethereum via Wormhole bridge and were later swapped for other stablecoins on Curve’s liquidity pools
     
  • Finally, arbitrage opportunities were created due to inefficiencies between Curve and several exchanges which led to the de-pegging of TerraUSD.

Proposals I.

  • Both the community and the validators hotly debated whether it would be better to burn the excess supply or to fork and create a new chain.
     
  • The initial revival plan called "Terra Ecosystem Revival Plan" contemplated the redistribution of 1B tokens according to the following structure:
    • ​400M (40%) to LUNA holders before the depegging event
    • 400M (40%) to UST holders pro-rata at the time of the new network upgrade
    • 100M (10%) to Luna holders at the final moment of the chain halt
    • 100M (10%) to the Community Pool to fund future development.​​
       
  • However, the proposal was fraught with ambiguity and the community made it clear that it disagreed with the proposal. The majority was in favour of keeping only one network and burning excessive tokens.

Proposals II.

  • Another proposal called "BURN and REMEDY fee with each LUNA transaction" from community member HelloThere came up with a dynamic proposal of burning part of the transaction fees
     
  • This plan proposed burning tokens according to the following scheme:​​
    • Start at 10%. Every 1.5 T burnt 1% drop in fee.
    • 5 T supply → 9% fee
    • 3.5T supply → 8% fee
    • 2T supply → 7% fee
    • 500B supply → 6%

            Now drop 1% every 100bn burnt

  • 400B supply → 5% fee
  • 300B supply → 4% fee
  • 200B supply ->3% fee
  • 100B supply → 2% fee
  • 2% fee till we hit 50B supply. Then 1% till we hit 1B. Then the fee stops

 

  • The proposal was met with positive responses, but Do Kwon and Terra executives did not show much interest in it

Proposals III.

  • Another proposal was the "LUNA Go Forward Proposal" from TerraBuilderAlliance, which proposed to fork the Terra chain into a new chain without algorithmic stablecoin.

  • TFL’s wallet (terra1dp0taj85ruc299rkdvzp4z5pfg6z6swaed74e6) will be removed in the whitelist for the airdrop, making Terra a fully community owned chain

  • Luna to be airdropped across Luna Classic stakers, Luna Classic holders, residual UST holders, and essential app developers of Terra Classic.

  • This proposal is almost identical to the final and accepted proposal from Do Kwon, known as "Terra Ecosystem Revival Plan 2" , which passed under "Proposal 1623 - Terra Builders Alliance: Rebirth Terra Network"


Terra 2.0 - LUNA Airdrop (Medium)

  • Proposal 1623 was approved with 65.5% of validators voting in favour
  • The new LUNA network was launched on 28 March, while the original chain was renamed to Terra Classic
  • ​Date of first airdrop: Genesis — May 28th, 2022 at 6:00 AM UTC
  • At Genesis, 30% of the LUNA airdrop will be immediately available to Pre-Attack users with wallets that had less than 10k LUNA (including staking derivatives) or deposited UST in Anchor, and Post-Attack users with any quantity of LUNA (including staking derivatives), UST, or both.
  • 70 % of the LUNA supply will be vested over next 2 years thereafter with 6 month cliff
  • Vested will be automatically staked to "random" Terra validators in order to preserve network
    security.
  • A number of projects including Astroport, Prism, RandomEarth, Spectrum and Nebula
    are migrating from Terra Classic to the Terra 2.0 network

 

Terra 2.0 - LUNA Airdrop (Medium)

LUNA Airdrop Allocation

Terra 2.0 - LUNA Airdrop (Medium)

LUNA Airdrop Ratios

Unlocking the algo box is a difficult problem, of course. But saying it's unsolvable seems short-sighted.

 

 

Satoshi certainly heard the Byzantine General's problem was impossible, but it didn't stop Satoshi from creating bitcoin and proving BFT could work

Interestingly, most fiat collapses are the result of gross abuse of supply by whoever controls the printing press (typically a govt trying to finance war)

 

Crypto algos can lay out transparent, on-chain rules, they could arguably become more reliable and predictable than state-run fiats, which can always be abused/manipulated based on politics.
 

Might be decades off tho.

The "cult of personality" is at the heart of a lot of successful experiments. Elon is the most obvious example.
 

Satoshi's cultish mystic also helped bitcoin climb out of obscurity.

 

Would you love ETH equally without Vitalik ?

Terra 2.0 Projects

Key Takeaways:

  • Not a Ponzi, but flawed and shaky design, yet very close to success
     
  • Anchor was 1 of the greatest crypto onboarding tools
     
  • Sexi UX, Wallets, Bridges, Swaps, Integrations
     
  • Trust in algo stables is broken, but the truth is every stable depegs at some point
     
  • Regulators are coming
     
  • The algo-stable dream is not dead tho

Thank you!

slides.com/stancel/utxo

Dnes 20:30!!!