{"id":61671,"date":"2022-05-19T07:00:00","date_gmt":"2022-05-19T04:00:00","guid":{"rendered":"https:\/\/forklog.com\/en\/?p=61671"},"modified":"2025-09-05T13:36:43","modified_gmt":"2025-09-05T10:36:43","slug":"terras-death-spiral-how-and-why-luna-and-ust-collapsed","status":"publish","type":"post","link":"https:\/\/u1f987.com\/en\/terras-death-spiral-how-and-why-luna-and-ust-collapsed\/","title":{"rendered":"Terra\u2019s death spiral: how and why LUNA and UST collapsed"},"content":{"rendered":"<p>The collapse of <a href=\"https:\/\/u1f987.com\/en\/news\/algorithmic-stablecoins-how-alternatives-to-usdt-and-usdc-are-evolving\">algorithmic stablecoin<\/a> UST and the highly capitalised token LUNA proved a real shock for the crypto industry \u2014 within days the savings of many users and the multi-million assets of major companies were devalued.<\/p>\n<p><!--more--><\/p>\n<p>Shortly before the collapse, the Terra ecosystem <a href=\"https:\/\/u1f987.com\/en\/news\/what-is-terra-luna\">Terra<\/a> trailed only Ethereum in TVL, which includes <a href=\"https:\/\/u1f987.com\/en\/news\/what-are-makerdao-mkr-and-the-dai-stablecoin\">MakerDAO<\/a>, <a href=\"https:\/\/u1f987.com\/en\/news\/what-is-uniswap-uni\">Uniswap<\/a>, <a href=\"https:\/\/u1f987.com\/en\/news\/what-is-compound-comp\">Compound<\/a> and other veterans of decentralized finance. The Anchor <a href=\"https:\/\/u1f987.com\/en\/news\/how-anchors-problems-could-destabilise-terras-economy-and-the-crypto-market\">platform was in third place<\/a> in the overall DeFi Llama ranking. <\/p>\n<p>The dizzying rise of Terra USD (UST) and the popularity of algorithmic stablecoins inspired many developers to create <a href=\"https:\/\/u1f987.com\/en\/news\/tron-to-launch-algorithmic-stablecoin-usdd\">similar projects<\/a> and <a href=\"https:\/\/u1f987.com\/en\/news\/frax-finance-to-create-reserve-crypto-fund-modeled-on-terra\">reserve crypto funds<\/a>.<\/p>\n<p>But everything changed in a matter of days: UST suddenly <a href=\"https:\/\/www.coingecko.com\/en\/coins\/terra-usd\">lost its peg<\/a> to the dollar, and the associated token <a href=\"https:\/\/www.coingecko.com\/en\/coins\/terra-luna\">LUNA almost became worthless<\/a>.<\/p>\n<p>ForkLog examined the causes of what happened, assessed current and potential future consequences for the industry, and the project\u2019s chances of recovery.<\/p>\n<div class=\"wp-block-text-wrappers-keypoints article_keypoints\">\n<ul class=\"wp-block-list\">\n<li>The collapse of LUNA and UST shook the crypto community&#8217;s confidence in the prospects of algorithmic stablecoins.<\/li>\n<li>The Terra ecosystem collapse attracted regulators&#8217; attention and mainstream media.<\/li>\n<li>The collapse of LUNA and UST hit the broader market, creating serious problems for a number of DeFi projects.<\/li>\n<\/ul>\n<\/div>\n<h2 class=\"wp-block-heading\">Colossus on feet of clay<\/h2>\n<p>Even at the height of LUNA and UST&#8217;s popularity, skeptics remained, doubting the infallibility of Terra&#8217;s mechanisms. For example, at the end of 2021, user FreddieRaynolds in a series of tweets warned the community about the project&#8217;s vulnerability to well-coordinated attacks requiring substantial capital.<\/p>\n<figure class=\"wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter\">\n<div class=\"wp-block-embed__wrapper\">\n<blockquote class=\"twitter-tweet\" data-width=\"500\" data-dnt=\"true\">\n<p lang=\"en\" dir=\"ltr\">A few weeks ago I responded to <a href=\"https:\/\/twitter.com\/tbr90?ref_src=twsrc%5Etfw\">@tbr90<\/a>\u2019s tweet with a brief outline of how a wealthy attacker could not only break <a href=\"https:\/\/twitter.com\/terra_money?ref_src=twsrc%5Etfw\">@terra_money<\/a> but profit heavily doing it with a Soros style Black Wednesday attack. Below I provide a detailed breadown\u2026~$1B capital needed.<a href=\"https:\/\/t.co\/MIbSH3Lwpq\">https:\/\/t.co\/MIbSH3Lwpq<\/a><\/p>\n<p>\u2014 FreddieRaynolds (@FreddieRaynolds) <a href=\"https:\/\/twitter.com\/FreddieRaynolds\/status\/1463960623402913797?ref_src=twsrc%5Etfw\">November 25, 2021<\/a><\/p><\/blockquote>\n<p><script async src=\"https:\/\/platform.twitter.com\/widgets.js\" charset=\"utf-8\"><\/script>\n<\/div>\n<\/figure>\n<p>In early May, just before Terra&#8217;s collapse, the Anchor deposit rate was reduced for the first time to just below 18%. The move was intended to smooth rising distortions and address several problems, including <a href=\"https:\/\/u1f987.com\/en\/news\/ust-stablecoin-briefly-lost-its-peg-to-the-us-dollar-amid-anchor-outflows\">the depletion of the project\u2019s reserves<\/a>.<\/p>\n<p>In response, users began withdrawing assets from the protocol en masse. On 7 May, Anchor deposits exceeded 14 billion UST, and a day later the figure stood at 11.77 billion UST (-16%).<\/p>\n<p>Against the backdrop of capital outflows from the flagship Terra project, Curve Finance said someone had begun selling UST en masse, causing the stablecoin to briefly lose its peg to the US dollar (at one point on 8 May the asset traded near $0.98). The developers noted the actions &#8220;faced strong resistance&#8221; in the form of counter-sales of ETH and stETH.<\/p>\n<blockquote class=\"twitter-tweet\">\n<p lang=\"en\" dir=\"ltr\">News of Curve Wars ?\u2694\ufe0f<\/p>\n<p>Yesterday, someone started selling UST en masse, so it started to depeg. However, that was met with a great resistance, so the peg was restored. To get enough USD for that, a lot of ETH and stETH were sold also.<\/p>\n<p>Aftermath? High Curve trading vol (>uni3) <a href=\"https:\/\/t.co\/ZChdZiVzcK\">pic.twitter.com\/ZChdZiVzcK<\/a><\/p>\n<p>\u2014 Curve Finance (@CurveFinance) <a href=\"https:\/\/twitter.com\/CurveFinance\/status\/1523170253316005890?ref_src=twsrc%5Etfw\">May 8, 2022<\/a><\/p><\/blockquote>\n<p> <script async src=\"https:\/\/platform.twitter.com\/widgets.js\" charset=\"utf-8\"><\/script><\/p>\n<p>The head of security at the Polygon project, Mudit Gupta, noted that the UST incident was accompanied by a string of suspicious transactions.<\/p>\n<p>According to him, on May 7 Terraform Labs <a href=\"https:\/\/etherscan.io\/tx\/0x18bd477f9beeff22b2ad0c6d48a9c0f02b542049789f0638f5ec50365f1d1de7\">removed<\/a> 150 million UST liquidity from Curve, after which an unknown newly created address <a href=\"https:\/\/etherscan.io\/tx\/0xaa23df48c53f221d0e8ac60ffc9e69340f3e8948fcdc936f3aee9c887d802abb\">transferred<\/a> over 84 million UST to the Ethereum network. A few minutes later ETH was dumped, Gupta noted.<\/p>\n<p>Shortly after that the company <a href=\"https:\/\/etherscan.io\/tx\/0xd9539185932804c05e64630bd56180807b6b2c10266b6e964ca73b11bf418016\">withdrew<\/a> an additional 100 million UST from Curve. <\/p>\n<p>When the price of the stablecoin started to fall, an unknown market participant <a href=\"https:\/\/etherscan.io\/address\/0x6b671b51258db0316dd89bc0075d6113488be5e8\">began selling ETH and buying UST<\/a>. The latter traded below the peg, allowing for profit.<\/p>\n<figure class=\"wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter\">\n<div class=\"wp-block-embed__wrapper\">\n<blockquote class=\"twitter-tweet\" data-width=\"500\" data-dnt=\"true\">\n<p lang=\"en\" dir=\"ltr\">\u2014 Terraform Labs removed another $100m of UST liquidity from Curve soon after<br \/>\u2014 As UST started to depeg, an unknown actor started dumping ETH and buying UST ($100m+)<br \/>\u2014 As UST was trading below peg, they made a profit all while avoiding bad optics around dumping Ether<\/p>\n<p>\u2014 Mudit Gupta (@Mudit__Gupta) <a href=\"https:\/\/twitter.com\/Mudit__Gupta\/status\/1523306189089828865?ref_src=twsrc%5Etfw\">May 8, 2022<\/a><\/p><\/blockquote>\n<p><script async src=\"https:\/\/platform.twitter.com\/widgets.js\" charset=\"utf-8\"><\/script>\n<\/div>\n<\/figure>\n<p>The founder of Terraform Labs, Do Kwon, explained that the company withdrew 150 million UST from Curve in preparation for launching the 4pool. After that, it withdrew another 100 million UST \u201cto reduce the imbalance.\u201d<\/p>\n<p>Kwon stressed that Terraform Labs had nothing to do with the 84 million UST operation. He also added that the company had no motive to depeg the stablecoin from the U.S. dollar.<\/p>\n<blockquote class=\"twitter-tweet\">\n<p lang=\"en\" dir=\"ltr\">And not sure what possible profit would have been gained even if we tried \u2014 50bp spread on UST while luna giganuked?<\/p>\n<p>\u2014 Do Kwon ? (@stablekwon) <a href=\"https:\/\/twitter.com\/stablekwon\/status\/1523316792545792001?ref_src=twsrc%5Etfw\">May 8, 2022<\/a><\/p><\/blockquote>\n<p> <script async src=\"https:\/\/platform.twitter.com\/widgets.js\" charset=\"utf-8\"><\/script><\/p>\n<p>To stabilise the situation and bolster UST, the non-profit organisation Luna Foundation Guard (LFG) <a href=\"https:\/\/u1f987.com\/en\/news\/lfg-allocates-1-5bn-to-back-the-ust-peg\">provided<\/a> loans to OTC firms \u2014 in $750m in BTC and $750m in stablecoins.<\/p>\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p>\u201cTraders will trade capital on both sides of the market, helping to achieve both the first and the second objectives, ultimately maintaining the parity of the LFG reserve pool (denominated in BTC) as market conditions gradually stabilise,\u201d the foundation said.<\/p>\n<\/blockquote>\n<p>Soon after, the organisation published its new <a href=\"https:\/\/www.blockchain.com\/btc\/address\/bc1q9d4ywgfnd8h43da5tpcxcn6ajv590cg6d3tg6axemvljvt2k76zs50tv4q\">Bitcoin address<\/a> and noted that it would continue to provide loans to market makers.<\/p>\n<p>Against these events, the market continued to fall. By May 10, Bitcoin&#8217;s price had tested support near $30,000. Most altcoins fell even more steeply. Panic swept the market.<\/p>\n<p>Against the backdrop of the market crash, UST <a href=\"https:\/\/www.theblockcrypto.com\/post\/145978\/luna-foundation-guard-seeks-more-than-1-billion-to-shore-up-ust-stablecoin-sources\"><a href=\"https:\/\/u1f987.com\/en\/news\/ust-stablecoin-loses-dollar-peg-amid-crypto-market-collapse\">lost its peg again<\/a><\/a> to the U.S. dollar. In the night of May 10, the asset traded below $0.62.<\/p>\n<p>An analyst at The Block, Larry Cermak, noted that Jump Crypto, Alameda Research and other Terra-supporting entities allocated an additional $2 billion \u201cto rescue UST.\u201d However, in his view the only way to save the asset is to fully collateralise it.<\/p>\n<blockquote class=\"twitter-tweet\">\n<p lang=\"en\" dir=\"ltr\">I personally think the only way to save it now is by fully (or potentially very close to fully) collateralizing. Otherwise I don\u2019t see it ever being used again<\/p>\n<p>\u2014 Larry Cermak (@lawmaster) <a href=\"https:\/\/twitter.com\/lawmaster\/status\/1523845779185618947?ref_src=twsrc%5Etfw\">May 10, 2022<\/a><\/p><\/blockquote>\n<p> <script async src=\"https:\/\/platform.twitter.com\/widgets.js\" charset=\"utf-8\"><\/script><\/p>\n<p>On Wednesday, May 11, Terra USD again lost its peg to the U.S. dollar \u2014 its price fell below $0.23. The LUNA token used to issue the stablecoin fell more than 80%.<\/p>\n<p><script async=\"\" src=\"https:\/\/telegram.org\/js\/telegram-widget.js?19\" data-telegram-post=\"forklog\/25438\" data-width=\"100%\"><\/script><\/p>\n<p>Sources <a href=\"https:\/\/www.theblockcrypto.com\/post\/145978\/luna-foundation-guard-seeks-more-than-1-billion-to-shore-up-ust-stablecoin-sources\">The Block<\/a> reported plans for LFG to raise $1 billion to stabilise the stablecoin. According to the article\u2019s sources, the organisation sought funding from \u201csome of the largest investment firms and market makers in the industry,\u201d offering investors to buy LUNA at a 50% discount as part of the deal.<\/p>\n<p>However, according to The Block Research analyst Miki Honkasalo, the attempt to raise funds by LFG \u201cfailed.\u201d<\/p>\n<figure class=\"wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter\">\n<div class=\"wp-block-embed__wrapper\">\n<blockquote class=\"twitter-tweet\" data-width=\"500\" data-dnt=\"true\">\n<p lang=\"en\" dir=\"ltr\">A few hours ago started hearing that the Luna fundraise had fallen apart.<\/p>\n<p>Difficult to imagine any firm would put their reputation on the line back this dumpster fire.<\/p>\n<p>It&#8217;s over.<\/p>\n<p>(deleted original tweet about this to not jump the gun, but now it seems clear)<\/p>\n<p>\u2014 mhonkasalo (@mhonkasalo) <a href=\"https:\/\/twitter.com\/mhonkasalo\/status\/1524284307098927104?ref_src=twsrc%5Etfw\">May 11, 2022<\/a><\/p><\/blockquote>\n<p><script async src=\"https:\/\/platform.twitter.com\/widgets.js\" charset=\"utf-8\"><\/script>\n<\/div>\n<\/figure>\n<p>Researcher Hasu compared the project to a Ponzi scheme, noting that, \u201cUST is worse than BitConnect.\u201d<\/p>\n<p>On May 11, Do Kwon <a href=\"https:\/\/u1f987.com\/en\/news\/terraform-labs-ceo-outlines-plan-to-rescue-ust-as-luna-tumbles-below-1\">presented<\/a> a plan to restore the price of the algorithmic stablecoin. <\/p>\n<p>According to him, the necessary step before taking further measures would be to absorb the supply from holders of UST seeking to exit the asset.<\/p>\n<p>The plan envisaged accelerating LUNA issuance. Under the mechanism, 1 UST should always be exchangeable for $1 in LUNA. In Kwon&#8217;s view, this \u201cwill allow the system to absorb UST more quickly.\u201d<\/p>\n<p>Against concerns about hyperinflation, LUNA&#8217;s price fell below $1, and UST settled around $0.5. The ecosystem\u2019s loss of trust dragged the price of the Anchor token (ANC) down as well.<\/p>\n<p>Major South Korean exchanges reacted to the sudden LUNA drop: Coinone <a href=\"https:\/\/u1f987.com\/en\/news\/terraform-labs-ceo-outlines-plan-to-rescue-ust-as-luna-tumbles-below-1\">suspended<\/a> trading of the asset, Korbit and Bithumb issued investor warnings.<\/p>\n<p>The Binance Futures derivatives platform <a href=\"https:\/\/u1f987.com\/en\/news\/binance-delists-coin-margined-luna-perpetual-contracts\">delisted<\/a> perpetual contracts on LUNA settled in the base asset.<\/p>\n<p>Online chatter suggested that BlackRock and Citadel Securities had taken 100,000 BTC from Gemini and swapped 25,000 BTC for UST; they allegedly contacted Do Kwon and proposed a large discount for UST to buy a big block of cryptocurrency.<\/p>\n<p>Then BlackRock and Citadel allegedly dumped the assets, triggering a crash in UST, LUNA and the entire market.<\/p>\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p>\u201cBlackRock and Citadel knew that Anchor, which owned a sizeable stake in LUNA, was a Ponzi scheme, and this collapse would trigger a larger outflow than Anchor could cover. It would allow them to buy Bitcoin cheaply to cover their loan and keep the spread,\u201d the theory went.<\/p>\n<\/blockquote>\n<p>Grownups across the space spread the claim, including IOHK chief Charles Hoskinson. He later deleted the tweet and noted that the rumours were unverified.<\/p>\n<p>Gemini said it did not provide a 100,000 BTC loan to institutional counterparties.<\/p>\n<figure class=\"wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter\">\n<div class=\"wp-block-embed__wrapper\">\n<blockquote class=\"twitter-tweet\" data-width=\"500\" data-dnt=\"true\">\n<p lang=\"en\" dir=\"ltr\">We are aware of a recent story that suggested Gemini made a 100K BTC loan to large institutional counter-parties that reportedly resulted in a selloff in <a href=\"https:\/\/twitter.com\/search?q=%24LUNA&#038;src=ctag&#038;ref_src=twsrc%5Etfw\">$LUNA<\/a>. Gemini made no such loan.<\/p>\n<p>\u2014 Gemini (@Gemini) <a href=\"https:\/\/twitter.com\/Gemini\/status\/1524428615844339718?ref_src=twsrc%5Etfw\">May 11, 2022<\/a><\/p><\/blockquote>\n<p><script async src=\"https:\/\/platform.twitter.com\/widgets.js\" charset=\"utf-8\"><\/script>\n<\/div>\n<\/figure>\n<p>BlackRock called the rumours of its involvement in the crash \u201ccategorically false\u201d and said the company does not trade the asset. Citadel likewise said it has no dealings with stablecoins, including Terra USD.<\/p>\n<p>On May 12, when LUNA hovered around $0.05, Terraform Labs <a href=\"https:\/\/u1f987.com\/en\/news\/terraform-labs-outlines-additional-measures-to-restore-luna-and-ust\">proposed a range of additional measures<\/a> to revive the ecosystem. <a href=\"https:\/\/station.terra.money\/proposal\/1164\">One of the initiatives<\/a> proposed expanding the base LUNA pool and increasing the cryptocurrency\u2019s issuance, which purportedly would enable faster withdrawal of UST from circulation.<\/p>\n<p>The measures drew criticism online. Some users noted that the latter would only accelerate the ecosystem\u2019s death spiral and lead to the further devaluation of LUNA.<\/p>\n<p>Larry Cermak wrote that the only way out for Terraform Labs is to abandon UST and focus on developing the main network. He stressed that as the ecosystem grows, the project team must extinguish the stablecoin\u2019s debt.<\/p>\n<blockquote class=\"twitter-tweet\">\n<p lang=\"en\" dir=\"ltr\">Of course even if they do what I say the chance of success is probably near zero. But right now it\u2019s 100% zero and can\u2019t possibly be better off for legal reasons. Also if Terra has any reserves left, they should absolutely commit that to making users whole<\/p>\n<p>\u2014 Larry Cermak (@lawmaster) <a href=\"https:\/\/twitter.com\/lawmaster\/status\/1524680402182578176?ref_src=twsrc%5Etfw\">May 12, 2022<\/a><\/p><\/blockquote>\n<p> <script async src=\"https:\/\/platform.twitter.com\/widgets.js\" charset=\"utf-8\"><\/script><\/p>\n<p>Anchor&#8217;s community also <a href=\"https:\/\/u1f987.com\/en\/news\/anchor-community-proposes-trimming-ust-deposit-yield-to-4\">prepared an \u201cemergency proposal\u201d<\/a>: to lower the target annual yield on UST deposits to 4%. Its author, Daniel Hong, explained that this step would curb the addition of UST to the circulating supply.<\/p>\n<p>By then the outflow from Anchor had reached almost 9.5 billion UST.<\/p>\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"940\" height=\"455\" src=\"https:\/\/u1f987.com\/wp-content\/uploads\/anchor-dep-1.png\" alt=\"Spiral of Death Terra: how and why LUNA and UST collapsed\" class=\"wp-image-173550\" srcset=\"https:\/\/u1f987.com\/wp-content\/uploads\/anchor-dep-1.png 940w, https:\/\/u1f987.com\/wp-content\/uploads\/anchor-dep-1-300x145.png 300w, https:\/\/u1f987.com\/wp-content\/uploads\/anchor-dep-1-768x372.png 768w\" sizes=\"auto, (max-width: 940px) 100vw, 940px\" \/><figcaption>Data <a href=\"https:\/\/terra.smartstake.io\/anc\">SmartStake<\/a> as of 12.05.2022.<\/figcaption><\/figure>\n<p>Developers paused the network several times, explaining the moves as necessary to protect the network from potential governance attacks and to develop a &#8220;recovery plan&#8221; for the system.<\/p>\n<p>In the wake of the first halt, LUNA traded just above $0.01. On May 13, when the price hit $0.00006, Binance <a href=\"https:\/\/u1f987.com\/en\/news\/terra-validators-restart-network-after-second-outage-in-24-hours\">removed<\/a> nearly all LUNA and UST trading pairs from the spot market. The platform subsequently resumed trading of these assets in BUSD pairs. <\/p>\n<p>The result of Terraform Labs\u2019 \u201crescue\u201d measures was a surge of LUNA supply to a astronomical 6.5 trillion coins. That contributed to further devaluation of the project\u2019s native token.<\/p>\n<h2 class=\"wp-block-heading\">Echoes of LUNA<\/h2>\n<p>The enormous volatility of LUNA <a href=\"https:\/\/u1f987.com\/en\/news\/terra-validators-restart-network-after-second-outage-in-24-hours\">caused price display problems<\/a> in the decentralized oracle network Chainlink, used by many DeFi projects for operation.<\/p>\n<p>The Venus lending protocol reported a loss of $13.5m due to Chainlink oracle settings, which prevented the price of LUNA from displaying below $0.1.<\/p>\n<blockquote class=\"twitter-tweet\">\n<p lang=\"en\" dir=\"ltr\">Venus on #BSC was exploited for $13.5m today because whoever set that min-price limit probably assumed $LUNA would never collapse so hard. <\/p>\n<p>This is wild! #chainlink #LINK <a href=\"https:\/\/t.co\/6DwXnw2ilY\">https:\/\/t.co\/6DwXnw2ilY<\/a> <a href=\"https:\/\/t.co\/j3mC9hPJJ4\">pic.twitter.com\/j3mC9hPJJ4<\/a><\/p>\n<p>\u2014 DefiMoon ?? (@DefiMoon) <a href=\"https:\/\/twitter.com\/DefiMoon\/status\/1524896344414081040?ref_src=twsrc%5Etfw\">May 12, 2022<\/a><\/p><\/blockquote>\n<p> <script async=\"\" src=\"https:\/\/platform.twitter.com\/widgets.js\" charset=\"utf-8\"><\/script><\/p>\n<p>Subsequently the Venus team briefly disabled the protocol, then launched VIP-61 to set the zero collateral factor on LUNA and UST markets.<\/p>\n<p>Defenders of a similar exploit, Blizz Finance on Avalanche, reported a related attack. <\/p>\n<p>In the panic, even the most liquid centralised stablecoins stumbled\u2014USDT depegged, while USDC remained largely intact.<\/p>\n<blockquote class=\"twitter-tweet\" data-conversation=\"none\">\n<p lang=\"en\" dir=\"ltr\">8\/ People even started selling <a href=\"https:\/\/twitter.com\/search?q=%24usdt&#038;src=ctag&#038;ref_src=twsrc%5Etfw\">$usdt<\/a> in panic <a href=\"https:\/\/t.co\/k4BzSNJf1Z\">pic.twitter.com\/k4BzSNJf1Z<\/a><\/p>\n<p>\u2014 DeFi Made Here (@DeFi_Made_Here) <a href=\"https:\/\/twitter.com\/DeFi_Made_Here\/status\/1525448552255832064?ref_src=twsrc%5Etfw\">May 14, 2022<\/a><\/p><\/blockquote>\n<p> <script async src=\"https:\/\/platform.twitter.com\/widgets.js\" charset=\"utf-8\"><\/script><\/p>\n<p>Withdrawing assets from Anchor, followed by the LUNA and UST collapse, hammered not only Terra\u2019s TVL but the DeFi sector\u2019s aggregate metrics as a whole.<\/p>\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"260\" src=\"https:\/\/u1f987.com\/wp-content\/uploads\/DeFi-Llama-6-1024x260.png\" alt=\"Spiral of Death Terra: how and why LUNA and UST collapsed\" class=\"wp-image-173551\" srcset=\"https:\/\/u1f987.com\/wp-content\/uploads\/DeFi-Llama-6-1024x260.png 1024w, https:\/\/u1f987.com\/wp-content\/uploads\/DeFi-Llama-6-300x76.png 300w, https:\/\/u1f987.com\/wp-content\/uploads\/DeFi-Llama-6-768x195.png 768w, https:\/\/u1f987.com\/wp-content\/uploads\/DeFi-Llama-6.png 1374w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><figcaption>Nakanuve of the DeFi sector before the collapse: total DeFi TVL exceeded $190bn; at the time of writing (18.05.2022) it stood at $111bn. Data: <a href=\"https:\/\/defillama.com\/\">DeFi Llama<\/a>.<\/figcaption><\/figure>\n<p>Some market experts say the Terra incident, regardless of the outcome, will have serious consequences for the crypto market. Blogger Dennis Porter noted that regulators are using the UST crash as a main argument for comprehensive stablecoin regulation and the promotion of CBDCs.<\/p>\n<p>U.S. Treasury Secretary Janet Yellen said that the depegging of Terra USD underscored the need for \u201ca regulatory framework for stablecoins that minimises volatility.\u201d<\/p>\n<p>South Korea&#8217;s People Power Party member Yun Chan-Hen urged parliamentary hearings on the recent Terra ecosystem collapse.<\/p>\n<p><script async=\"\" src=\"https:\/\/telegram.org\/js\/telegram-widget.js?19\" data-telegram-post=\"forklog\/25549\" data-width=\"100%\"><\/script><\/p>\n<p>According to some reports, three Terraform Labs legal team employees resigned after the UST and LUNA crash. It also emerged that one of South Korea\u2019s leading law firms, LKB &#038; Partners, is preparing to sue Do Kwon.<\/p>\n<h2 class=\"wp-block-heading\">What lies ahead for Terra?<\/h2>\n<p>Clearly, the measures taken by the developers only worsened the situation around LUNA and UST. Their result was hyperinflation of the native token and a complete loss of community trust in the project and ecosystem.<\/p>\n<p>In a bid to turn the tide, Kwon proposed rebooting the network with 1 billion tokens. He later said he was \u201cheartbroken\u201d that his invention had caused so much pain to the community.<\/p>\n<blockquote class=\"twitter-tweet\">\n<p lang=\"en\" dir=\"ltr\">I still believe that decentralized economies deserve decentralized money. But it\u2019s clear that in its current form UST will not be that money<\/p>\n<p>\u2014 Do Kwon (@stablekwon) <a href=\"https:\/\/twitter.com\/stablekwon\/status\/1524971597110681612?ref_src=twsrc%5Etfw\">May 13, 2022<\/a><\/p><\/blockquote>\n<p> <script async src=\"https:\/\/platform.twitter.com\/widgets.js\" charset=\"utf-8\"><\/script><\/p>\n<p>He assured the community that neither he nor the affiliated organisations benefited from what happened. The head of Terraform Labs also stressed that he did not sell LUNA and UST during the crisis.<\/p>\n<p>In the community, the idea of a hard fork and a new token was floated. The distribution of the latter could take place according to a network snapshot taken before the market crash.<\/p>\n<p>The initiative also envisages a new governance mechanism for the blockchain and the creation of a pool to redeem the algorithmic stablecoin UST.<\/p>\n<blockquote class=\"twitter-tweet\">\n<p lang=\"en\" dir=\"ltr\">Final SOLUTION for <a href=\"https:\/\/twitter.com\/terra_money?ref_src=twsrc%5Etfw\">@terra_money<\/a> <a href=\"https:\/\/twitter.com\/stablekwon?ref_src=twsrc%5Etfw\">@stablekwon<\/a> and community:<br \/>1) Hardfork to TERRA2<br \/>2) Snapshot of all holdings before collapse trigger and provide hodlers with new <a href=\"https:\/\/twitter.com\/hashtag\/LUNA2?src=hash&#038;ref_src=twsrc%5Etfw\">#LUNA2<\/a> <br \/>3) Create new better chain with <a href=\"https:\/\/twitter.com\/hashtag\/LUNA2?src=hash&#038;ref_src=twsrc%5Etfw\">#LUNA2<\/a> <a href=\"https:\/\/twitter.com\/hashtag\/UST2?src=hash&#038;ref_src=twsrc%5Etfw\">#UST2<\/a><br \/>4) Pool to repay old <a href=\"https:\/\/twitter.com\/search?q=%24UST&#038;src=ctag&#038;ref_src=twsrc%5Etfw\">$UST<\/a> peg<br \/>5) <a href=\"https:\/\/twitter.com\/hashtag\/BUIDL?src=hash&#038;ref_src=twsrc%5Etfw\">#BUIDL<\/a><\/p>\n<p>? <a href=\"https:\/\/twitter.com\/search?q=%24LUNA&#038;src=ctag&#038;ref_src=twsrc%5Etfw\">$LUNA<\/a> <a href=\"https:\/\/twitter.com\/LFG_org?ref_src=twsrc%5Etfw\">@LFG_org<\/a> <\/p>\n<p>RT!<\/p>\n<p>\u2014 Lionel?\u20bf (@CryptoLionel) <a href=\"https:\/\/twitter.com\/CryptoLionel\/status\/1524971597110681612?ref_src=twsrc%5Etfw\">May 13, 2022<\/a><\/p><\/blockquote>\n<p> <script async src=\"https:\/\/platform.twitter.com\/widgets.js\" charset=\"utf-8\"><\/script><\/p>\n<p>Binance chief Changpeng Zhao <a href=\"https:\/\/u1f987.com\/en\/news\/changpeng-zhao-questions-terra-hard-fork-viability\">doubted<\/a> Terra\u2019s hard fork viability. In his view, the new chain would have little intrinsic value.<\/p>\n<p>Zhao also questioned the use of LFG\u2019s Bitcoin reserves. He said the assets should have been directed to supporting UST.<\/p>\n<p>On May 16, LFG representatives said that as a result of UST purchases, Bitcoin reserves were almost exhausted. Of 80,394 BTC as of May 7, only 313 BTC remained.<\/p>\n<p>Many expressed amazement that massive \u201cBitcoin interventions\u201d had done little to help UST.<\/p>\n<blockquote class=\"twitter-tweet\">\n<p lang=\"en\" dir=\"ltr\">The $3bn in reserves were used to market buy <a href=\"https:\/\/twitter.com\/search?q=%24UST&#038;src=ctag&#038;ref_src=twsrc%5Etfw\">$UST<\/a> and it still depegged. That\u2019s crazy.<\/p>\n<p>\u2014 Harry (@CryptoHarry_) <a href=\"https:\/\/twitter.com\/CryptoHarry_\/status\/1526273111829917696?ref_src=twsrc%5Etfw\">May 16, 2022<\/a><\/p><\/blockquote>\n<p> <script async src=\"https:\/\/platform.twitter.com\/widgets.js\" charset=\"utf-8\"><\/script><\/p>\n<p>Some <a href=\"https:\/\/twitter.com\/IIICapital\/status\/1526184661155725315?s=20&#038;t=Uh8Mm24NResyH4pIsJZ5KQ\">saw a positive<\/a> in the sense that the first cryptocurrency did not crash after mass sales in an attempt to save Terra.<\/p>\n<p>On May 14, Ethereum founder Vitalik Buterin <a href=\"https:\/\/u1f987.com\/en\/news\/vitalik-buterin-urges-terra-to-prioritise-compensation-for-small-investors\">called<\/a> for Terra to focus on compensating small investors, backing a Twitter user PersianCapital\u2019s idea.\u00a0<\/p>\n<p>Days later Do Kwon <a href=\"https:\/\/forklog.io\/ceo-terraform-labs-predlozhil-provesti-hardfork-dlya-vozrozhdeniya-terra\/\">proposed<\/a> a Terra hard fork to a new network with an airdrop.<\/p>\n<p>The plan envisaged that the new network would keep the Terra name with the LUNA token. The original blockchain would become Terra Classic with Luna Classic (LUNC) accordingly.<\/p>\n<p>The total LUNA supply would be 1 billion tokens, with a staking reward target of 7%.<\/p>\n<p>However, in a preliminary Terra poll, the majority of Terra\u2019s community did not back the hard fork idea.<\/p>\n<h2 class=\"wp-block-heading\">Conclusions<\/h2>\n<p>The Terra incident is undoubtedly one of the most high-profile events in crypto history. So far no DeFi project had reached such scale before its collapse.<\/p>\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<p>\u201cRescue measures\u201d by the community merely accelerated the crash. Expanding LUNA\u2019s supply to astronomical levels did not absorb UST, but rather fuelled hyperinflation.<\/p>\n<\/blockquote>\n<p>The odds of escaping the \u201cdeath spiral\u201d became increasingly remote \u2014 the almost empty LFG treasury stands as evidence. It remains unclear whether investors will ever be compensated, at least partially.<\/p>\n<p>The future prospects for algorithmic stablecoins remain uncertain, given the loss of trust caused by Terra\u2019s collapse. Developers of some projects, including Tron\u2019s USDD, are not ready to fold. On the other hand, many new algo-stablecoins are losing their pegs.<\/p>\n<p>The path to Terra\u2019s revival, if any, will be long and arduous. After all, the core problem lies not in the technical design or peg mechanism, but in restoring user trust.<\/p>\n<p>Subscribe to ForkLog news on Telegram: <a href=\"https:\/\/t.me\/forklogfeed\" target=\"_blank\" rel=\"nofollow noopener\">ForkLog Feed<\/a> \u2014 the full stream of news, <a href=\"https:\/\/telegram.me\/forklog\" target=\"_blank\" rel=\"nofollow noopener\">ForkLog<\/a> \u2014 the most important news, infographics and opinions.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>ForkLog examined the causes of Terra&#8217;s collapse, assessed current and potential future implications for the industry, and the project\u2019s recovery prospects.<\/p>\n","protected":false},"author":1,"featured_media":61672,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"select":"1","news_style_id":"5","cryptorium_level":"","_short_excerpt_text":"","creation_source":"","_metatest_mainpost_news_update":false,"footnotes":""},"categories":[1144],"tags":[807,852],"class_list":["post-61671","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-longreads","tag-stablecoins","tag-terra"],"aioseo_notices":[],"amp_enabled":true,"views":"176","promo_type":"1","layout_type":"5","short_excerpt":"","is_update":"","_links":{"self":[{"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/posts\/61671","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/comments?post=61671"}],"version-history":[{"count":1,"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/posts\/61671\/revisions"}],"predecessor-version":[{"id":61673,"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/posts\/61671\/revisions\/61673"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/media\/61672"}],"wp:attachment":[{"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/media?parent=61671"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/categories?post=61671"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/tags?post=61671"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}