the Collapse of LUNA: What’s the Reason?

In the past two days, Luna has been on the hot search list of various platforms. Although it is not as famous as Bitcoin, it is similar to the original intention of launching Bitcoin. The birth of Luna Coin is to create a peer-to-peer electronic currency system.

The Luna coin, which once rose as high as nearly $119 a piece, has continued to fall in the recent fluctuations in the currency circle. There has been a one-day plunge of 99%, and it has now fallen below $0.007. There are actually three reasons behind this “return to zero” style crash. stock strength.

Is the collapse of LUNA a conspiracy of capital?

The fall of LUNA has attracted the attention of netizens, investors and encryption experts. There were rumors that Citadel Capital was involved in the UST debacle. This hedge fund tied to shorting GameStop in 2021 could be involved in shorting LUNA and the massive sell-off in UST that started this week. There are reports that Citadel borrowed 100,000 BTC and used it to short UST.

One of the most popular claims is the George Soros-inspired “attack” on the Terra ecosystem, in which buyers made more than $800 million.

Ransu Salovaara, CEO of Likvidi, echoed the claim, “Some have chosen UST’s algorithmic pegs as a target for market manipulation, and borrowed large amounts of Bitcoin to do so, in what some call a ‘Soros-style’ UST attack. It is estimated that, Short sellers made about $800 million on the event.”

The “attack” has drawn mainstream attention, with U.S. Treasury Secretary Janet Yellen mentioning algorithmic stablecoins on Tuesday, highlighting the “risks” posed by the mechanism. Economist Frances Coppola agreed that LUNA’s downfall was an attack.
CNBC Crypto Trader host Ran NeuNer, a “good friend” to Do Kwon, suggested that U.S. market maker Citadel may be behind the “attack.” This gave rise to rumors.

While Citadel Securities founder Ken Griffin bluntly dislikes the crypto industry — likening the trillion-dollar market to abstract art — claims about Citadel’s attack on the UST remain speculative.

White hat hacker Tree of Alpha said the LUNA debacle was “by far the biggest death spiral in the history of cryptocurrency.” Castle Ventures’ Nic Carter also said it was “the most significant crash in the history of crypto.”

How can UST and LUNA save themselves after reviewing Terra’s failure and status quo?

First review the de-anchoring incident and LFG’s rescue strategy.

1. From the early morning of May 8th to the evening of May 8th, Terra removed the liquidity in Curve to prepare for the 4pool including UST, FRAX, USDT, and USDC. At this time, 84 million UST fell to Curve. UST has two small-scale departures from 1 USD, and the address starting with “0x6b67” consumes 70,000 ETH (50,000 are used to convert to USDT and buy UST, and the other 20,000 ETH is sent to Binance) and “0x5996” The efforts of the first two addresses (580 million UST accumulated), UST recovered $1.
2. From the evening of May 9th to May 10th, there was a huge amount of transactions in UST at slightly less than 1 US dollar. Binance also started the “UST defense war”, but the war failed in the end, and UST fell to a minimum of 0.6 near the dollar. Some have already asserted that Terra is failing. Binance suspends the deposit and withdrawal of UST, the operation on the Terra chain is stuck, and it is difficult for UST to be destroyed on the chain to redeem LUNA.
3. On the morning of May 11, The Block reported that LFG was seeking to raise more than $1 billion from institutions to support UST. Jump Trading, Celsius and Jane Street had already committed to the financing, and institutions bought LUNA at 50% of the price. Locked for one year, and then released linearly on a monthly basis. Then came the news of the failure of financing, because LUNA fell too fast, the discount price given by LFG has little meaning. Afterwards, LUNA and UST were greeted with further declines, with LUNA heading towards $1 ahead of UST, and LUNA’s previous high of over $100.
4. On the afternoon of May 11th, Terra Research announced a proposal to increase the minting capacity of UST (the theoretical upper limit of minting within a certain slippage in a day, and the actual burning of UST due to competition between traders and arbitrageurs may be higher than this value) from $293 million to $1.2 billion to accelerate deflation in UST. Subsequent plans tend to sacrifice LUNA to save UST, and LUNA accelerates its decline.
5. On May 12, Terra officially stated that Proposition 1164 would expand the size of the base pool and speed up the burning speed of UST, helping to narrow the on-chain price gap. TFL launched three urgent actions: destroying UST in the community pool; destroying the remaining 371 million UST across the chain on Ethereum; staking 240 million LUNA to defend against network governance attacks.

The failure of LUNA does not mean the failure of the encryption market and the failure of algorithmic stablecoins. Any innovation has a price before it matures, although the price is too painful. Today, LUNA is undoubtedly a wake-up call for all encryption entrepreneurs. While innovating, remember to fear risks and take into account extreme environments and black swans, because you never know what will come in the next second.