The Luna UST crash was a major disaster in the cryptocurrency world. Within 48 hours, a $40 billion project collapsed, leaving it essentially worthless. The crash was caused by a combination of factors, including the de-pegging of UST, the market crash of Bitcoin, and a death spiral in algorithmic stable points. This had a devastating effect on projects in the Terra Luna ecosystem, particularly Anchor Protocol. The founder of Terra has proposed a hard fork to rebuild without the stable coin UST, but there are concerns about trust and the potential for another dump. The future of Terra is uncertain, especially considering the current bear market. Key lessons include avoiding arrogant founders and not buying on the way down.
The Luna UST crash: Understanding the Fallout, Recovery Plan, and Future for the Terra Network
The Luna UST crash is being regarded as one of the biggest disasters in the history of cryptocurrency. Similar to the sinking of the Titanic, very few people predicted this collapse. Within a span of just 48 hours, a $40 billion project crumbled, leaving it essentially worthless overnight. Now that the dust has settled, it’s important to analyze what exactly happened, the recovery plan in place, and whether the Terra network has any chance of reclaiming its former glory.
The crash can be traced back to May 8th when an unknown whale sold $85 million worth of UST on CRV finance. This initiated a chain of events that led UST to go slightly below its peg. While the burn and mint mechanism for UST and Luna could have handled this slight de-peg, the market crash of Bitcoin exacerbated the problem. As more UST sellers entered the market, a massive sell pressure was created, leading to what is known as a death spiral in algorithmic stablecoins. People sold their UST to mint more Luna, further driving down the price of Luna. Eventually, the market cap of Luna fell below that of UST, resulting in the collapse we see today.
The value of the Terra ecosystem heavily relied on its DeFi protocols, making the crash devastating for the projects building on the Terra network. Projects like Anchor Protocol, with 80% dominance in total liquidity, suffered the most. Anchor Protocol, once considered a bedrock of the Terra ecosystem, turned out to be nothing more than a Ponzi scheme. Its governance token, Anchor, plummeted from $1.50 to around 10 cents, causing its market cap to shrink from $500 million to just $10 million.
Numerous other projects on the Terra chain experienced a similar fate, with losses of up to 95%. MARS, Spectrum, and Prism Protocol all suffered massive decreases, leaving behind a mere shadow of their former selves.
In terms of recovery, the founder of Terra, Do Kwon, has proposed a hard fork of the network without the stable coin UST. He even called the crash a hack and named the old chain Terra Classic while the new one would be named Terra. The proposal has garnered over 66% of votes within the community. The aim of this hard fork is to allow projects to continue development without the burden of the past. The decision to fork was inevitable considering Terra’s deep roots in the crypto world. Starting fresh seems to be the only viable option.
However, the recovery plan does not seem sufficient to regain the trust of those who lost their investments. A snapshot will be taken before and after the attack, and holders of Luna Classic before the crash will receive a percentage of new tokens. Yet, many holders mistrust Do Kwon with the new token, especially considering the recent fines totaling $105 million imposed on Terraform Labs and Do Kwon by the South Korean government for tax evasion.
The proposal has also raised concerns within the community. Luna holders who held before the crash face a one-year cliff, while post-attack Luna holders will receive 15% unlocked at the start. This has led to worries that there might be another market dump after the launch. The community is puzzled by Do Kwon’s decision not to reward the early Luna buyers, as he claims it was the “post-attack” buyers who saved the project from total failure.
Do Kwon recently shared his burn address on Twitter, encouraging people to burn 10% of the Luna holding to increase its price to at least $1. However, the increase in supply caused by the Terra Foundation complicates the situation. Now, it is up to the investors to rally and fight for their money.
Some projects have shown their support for the new fork, such as Anchor Protocol, Prism Protocol, Phoenix Finance, Nexus Protocol, and Astroport. However, there are still significant projects that have not announced their decision, including Spectrum, Mars, and Mirror Protocol.
Regaining the trust of new investors on this forked chain may prove to be challenging for Terra. Additionally, the heavy dependence on protocols building on Terra for its DeFi applications puts the network at greater risk. With former stable projects now on the fence and a lack of new projects willing to build on the new Terra chain, the future looks uncertain.
Even if the community’s trust is regained, Terra will have to battle current market conditions, including a potential bear market and recession. The odds are against them. However, the saying that time heals all wounds holds true, as there are developers in the crypto space who have experienced rug pulls in the past but continue to launch new projects and attract investors.
There are lessons to be learned from this disaster. One important lesson is to avoid investing in projects led by arrogant founders. The weaknesses and blind spots of founders often manifest in their projects. It is crucial to invest in people rather than just projects. Another lesson is to refrain from buying on the way down or attempting to catch a falling knife. Many investors considered buying Terra at various low points during its descent, only to realize they would have lost all their money.
Despite the challenging road ahead, the Terra network may still find a way to navigate the storm. Only time will tell if the network can recover from this devastating crash and regain its position in the crypto world.