Luna Terra Algorithmic Stablecoin Crash

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Terra Labs

The Terra/Luna ecosystem consisted of two tokens. Terra was intended to maintain a "stable" value of $1 USD. Luna, on the other hand, was intended to absorb the volatility from Terra. Holders of Terra were given a blockchain-enforced right to redeem their Terra immediately for $1 worth of Luna. In addition, through the anchor protocol, any holders of Terra could stake their tokens for a guaranteed 19.45% annual return in UST, creating a mechanism to increase the supply of the Terra stablecoin by a constant percentage. In the final stages of the protocol, a sizable reserve of bitcoin was built up to protect the protocol.

The exact events which happened prior to the collapse are unclear, but it is suspected that a large hedge fund may have convinced the Terra/Luna CEO Do Kwon to issue them a large number of UST at a discount, and dumped these tokens to rapidly lower the value of Terra and cause the peg to be lost. Once the peg was lost, this caused a panic, which caused many investors to exercise their redemption rights, redeeming Terra for the equivalent dollar value of Luna. Many of these investors also sold their Luna, lowering it's price. Within this state of Terra not being worth the $1 peg price, it was possible for arbitrageurs to continually purchase Terra below $1, mint $1 worth of Luna, then trade the resulting Luna back for even more Terra in an endless profit cycle. While there were mechanisms in place to limit the volume of redemptions, these also served to lower the confidence in the UST (which could no longer be redeemed for certain) and the resulting market price. While this mechanism was intended to restore Terra to the $1 peg, it failed to overcome the sell/redemption pressure, as an insufficient number of existing UST holders wanted to hold UST given the inherent risk.

The Terra peg was never restored, and as a result the supply of Luna continued to grow rapidly, causing the price to fall rapidly. The ability to convert Luna into other coins was also severely limited, and this further accelerated the exit. The entire $50b+ ecosystem built around Terra/Luna vanished to become nearly worthless, causing investors a near total loss of all funds.

About Do Kwon

Do Kwon was born in Seoul, South Korea as Kwon Do-Hyung on September 6, 1991. He displayed a keen interest in computing from a young age. He attended Daewon Foreign Language High School in Seoul and went on to earn a Bachelor's degree in computer science from Stanford University in 2015. After graduation, Kwon worked as either a salesperson and/or software engineer for Microsoft and Apple, marketing their products as a "business partner." He reportedly found the work uninteresting and left after just three months.

During 2015, he also developed his own product called AnyFi and eventually founded a company in 2016. AnyFi was a telecommunication company which developed a peer-to-peer communications solution using mesh network technology. AnyFi enables the creation of Peer-to-Peer (P2P) mesh networks, providing communities with network and internet access. The company quickly received $1 million in funding from investors. He was the CEO of AnyFi until 2017.

Kwon started to immerse himself in the crypto space around 2017, but it wasn't until 2018 that he was a blockchain developer and made significant strides with the launch of Basis Cash. Do Kwon was one of the pseudonymous co-founders of basis cash. Basis Cash aimed to create an algorithmic stablecoin pegged to the US dollar, and the project raised $133 million in funding. However, regulatory pressure from the SEC led to the project's demise, highlighting the challenges faced in the crypto industry.

The idea for Terraform Labs and the Terra blockchain was conceived in 2018 when Kwon and his college friend Nicholas Platias wrote the initial code in an Airbnb apartment. He became co-founder and CEO of Singapore-based Terraform Labs. Their aim was to create a decentralized payment system accessible to everyone. The name "Terra" was inspired by the character Terran from the game StarCraft, which Kwon is a fan of. The character is known for being adaptable in any situation. Do Kwon and Daniel Shin founded Terra Labs together in 2018. With the support of investors like Arrington Capital, Pantera Capital, and Galaxy Digital, they raised $150 million to build a high-speed blockchain integrated with a dollar-pegged stablecoin. This vision laid the foundation for Terra, Luna, and the Terra blockchain ecosystem.

Do Kwon is known for his confident and outspoken nature on Twitter, often criticizing competitors and detractors.

TBD - More research on

About Terra Labs

With the support of investors like Arrington Capital, Pantera Capital, and Galaxy Digital, they raised $150 million to build a high-speed blockchain integrated with a dollar-pegged stablecoin. This vision laid the foundation for Terra, Luna, and the Terra blockchain ecosystem.

Terraform Labs continued to attract investment, raising an additional $32 million from exchanges like Binance, OKX, Huobi Group, and Upbit. The Terra ecosystem, with its native LUNA token and stablecoins (UST, KRT, and SDT), became a major player in the decentralized finance (DeFi) space, achieving substantial success within a year and becoming one of the top cryptocurrency platforms globally.

"TerraUSD (UST) is an algorithmic stablecoin that is pegged at $1.00." "Both Terra (LUNA) and TerraUSD (UST) were created by Terraform Labs, founded in 2018 and located in Seoul, South Korea. At the centre of the story is Terra Labs CEO Do Kwon." "Mr. Kwon, a 30-year-old graduate of Stanford University, founded Terraform Labs in 2018 after stints as a software engineer at Microsoft and Apple. (He had a partner, Daniel Shin, who later left the company.)" "Do Kwon, the creator of the cryptos, is a South Korean national, while Terraform Labs and the Luna Foundation Guard, the organisations that support the digital coins, are both registered in Singapore." A designer said that Kwon "has not officially received any payment from the company. There is no token set for him."

"The term stablecoin mostly evokes United States dollar-pegged currencies that aim to maintain a $1 value. But it’s important to remember that this is mostly a matter of convenience. The same mechanisms underpinning today’s USD stablecoins can be used to create coins that are pegged to the euro, gold, even Bitcoin (BTC), Nasdaq futures, or some specific stock, such as Tesla (TSLA)."

"The idea to create an ‘algorithmic stablecoin’ where LUNA could be burnt in order to ‘mint’ UST to stabilize it whenever it loses its 1:1 peg to the dollar, and vice versa, is different to how other stable coins like Tether (USDT) and USD Coin (USDC) function. For example if UST hit 0.99, a small amount of LUNA would be burnt, and if it hit 1.01, a small amount of UST would be burnt."

"The creator of Terra, Terraform Labs, has received significant recent venture capital backing and investor interest as a “stablecoin for e-commerce creator.” Terra mints U.S. dollar- and Korean won-pegged algorithmic stablecoins (among others), using a governance balancing token (known as LUNA), with built-in monetary supply and economic incentives including fees and arbitrage opportunities."

"Terraform Labs raised more than $200 million from investment firms such as Lightspeed Venture Partners and Galaxy Digital to fund crypto projects built with the currency, even as critics questioned its technological underpinnings. Luna’s total value ballooned to more than $40 billion, creating a frenzy of excitement that swept up day traders and start-up founders, as well as wealthy investors."

"These stablecoins are then used as payment mechanisms in an ever-expanding Terraform Labs financial “ecosystem,” which also includes a protocol (“Mirror”) to create synthesized assets that track the performance of U.S. stocks, futures, and exchange-traded funds; a lending and savings platform (“Anchor”); and a partner payments platform (“Chai”). Terra also has anticipated plans to add DeFi asset management, additional lending protocols, and decentralized levered insurance protocol to this budding ecosystem."

"Terra stablecoins are the “centerpiece” that interconnect a burgeoning financial “infrastructure” that includes the aforementioned e-commerce payments, synthetic stocks, exchange-traded funds, derivatives, and other financial assets, savings, borrowing, and lending applications. The operation of Terra, as a protocol, incentivizes independent traders to purchase its stablecoins in exchange for LUNA if a stablecoin drops below its peg. The stability of Terra stablecoins transcends DeFi speculation. Given their many applications within its “Terra economy,” these algorithmic stablecoins also directly impacts the economic prospects of a host of businesses and consumers."

"[V]enture investment came pouring in to fund projects built on Luna’s underlying technology, like services for people to exchange cryptocurrencies or borrow and lend TerraUSD. Investors including Arrington Capital and Coinbase Ventures shoveled in more than $200 million between 2018 and 2021, according to PitchBook, which tracks funding."

"Pantera Capital, a hedge fund that invested in Mr. Kwon’s efforts, made a profit of about 100 times its initial investment, after selling roughly 80 percent of its holdings of Luna over the last year, said Paul Veradittakit, an investor at the firm." "Pantera turned $1.7 million into around $170 million." The recent crash was “unfortunate,” Mr. Veradittakit said. “A lot of retail investors have lost money. I’m sure a lot of institutional investors have, too.”

The company gained support from e-commerce companies in Asia and experienced rapid growth.

The Rise Of Luna

Terra company gained support from e-commerce companies in Asia and experienced rapid growth.

"In April, Luna’s price rose to a peak of $116 from less than $1 in early 2021, minting a generation of crypto millionaires. A community of retail traders formed around the coin, hailing Mr. Kwon as a cult hero. Mike Novogratz, chief executive of Galaxy Digital, which invested in Terraform Labs, announced his support by getting a Luna-themed tattoo."

Mr. Kwon, who operates out of South Korea and Singapore, gloated on social media. In April, he announced that he had named his newborn daughter Luna, tweeting, “My dearest creation named after my greatest invention.”

“It’s the cult of personality — the bombastic, arrogant, Do Kwon attitude — that sucks people in,” said Brad Nickel, who hosts the cryptocurrency podcast “Mission: DeFi.”

.

Baby Luna  

My dearest creation named after my greatest invention

If i ever have a son I shall name him Stable

Stable Kwon

Luna Foundation Guard

The executive summary presents a community proposal for deploying Bitcoin reserves to defend the UST peg. The proposal suggests creating a reserve pool that provides rapid BTC liquidity to support UST during downward peg deviations. The pool would operate similarly to the LUNA <> UST on-chain mechanism but with distinct architecture and parameters. The reserve model aims to deploy liquidity during crises and to be simple and operationalizable. Retail traders would access the pool at a discount, initially exchanging 1 UST for $0.98 in BTC, providing a backstop for UST during a crisis. After the crisis, external traders could purchase UST with BTC, draining the accumulated UST from the pool. The model assumes robust private markets for UST and expresses liquidity on decentralized and centralized exchanges. The reserve mechanics involve forking the virtual AMM for the LUNA <> UST mechanism, with differences in asset delivery/holding and parameterization for entry and exit flows. The proposal recommends asymmetrical parameters to split UST → BTC and BTC → UST flows and defend against oracle attacks. The parameters include BasePool, PoolRecoveryPeriod, and MinSpread. Empirical assessments are provided for exit flow parameters, indicating the available liquidity and slippage rates. Similarly, entry flow parameters are discussed based on desired replenishment of BTC in the reserve after a crisis. The section also addresses oracle attacks, including stale oracles and manipulated oracles, proposing strategies to protect against them. The implementation of daily BTC redemption caps is suggested as an additional safeguard. Community input is sought for further guidance and discussion.

The Reality

Do Kwon History With AnyFi

In January 2016, Kwon returned to South Korea and founded his own startup called Anyfi. However, it was later revealed that the company had received around $600,000 in government funding, which raised concerns due to a conflict of interest. The funding had been approved through a Korean incubator company operated by one of the co-founder's parents. Internal investigations by the Korean Ministry of SMEs and Startups discovered that Anyfi had received failing grades on initial evaluation reports and had misused funds for personnel expenses. The Ministry reported that they were able to retrieve the misused funds.

History of Failing Stablecoins

"Singapore’s parliament had already passed a law last month to increase oversight of firms like Luna that are domestically registered crypto companies but mainly operate abroad."

"Under its Payments Services Act 2019, entities that offer payment instruments, such as algorithmic stablecoins, require a Digital Payment Token Services (DPTS) licence. Though Singapore has only issued a DPTS licence to a handful of firms, it has granted many more companies temporary exemptions from the law." "Kwon’s organizations had neither a DPTS licence nor an official exemption, according to Singapore’s Financial Institutions Directory."

"The Securities and Exchange Commission (SEC) has been investigating Kwon Do-Hyung for violating the Securities Act, claiming that the blockchain service that made it possible to buy US equities with Terra was a violation of the Securities Act."

"UST is an algorithmic stablecoin and is operated via computer codes that help maintain its price equilibrium. The process involves burning or minting LUNA/UST to maintain the price of these tokens." "If UST traded below $1, [a simple] mechanism helped backstop it. Arbitrageurs would buy the cheap UST, redeem it for LUNA at a rate of 1 UST equaling $1, and sell those tokens on the market at a profit."

"Then there's the reserves. Terraform Labs founder and CEO Do Kwon created the Luna Foundation Guard, a consortium whose job it is to protect the peg. The LFG had about $2.3 billion in bitcoin reserves, with plans to expand that to $10 billion worth of bitcoin and other crypto assets. If UST dipped below $1, bitcoin reserves would be sold and UST bought with the proceeds. If UST goes above $1, creators would sell UST until it goes back to $1, with the profit being used to buy more bitcoin to pad out the reserves."

"It’s important to realize just how fragile the Terra protocol design was. In a nutshell, UST was “collateralized” by LUNA, the gas token of the Terra blockchain. Since there was a fairly solid DeFi and nonfungible token ecosystem developed on Terra, the LUNA token had some inherent value that helped boost the initial supply of UST." "In order for this ecosystem to be continually viable, there must be a perpetual baseline level of demand in the Terra stablecoins and also the governance token, LUNA. In other words, there must be sufficient arbitrage activity between the two tokens, as well as sufficient transactional fees in the Terra ecosystem and mining demand in the network."

"The way the mechanism worked was, in principle, similar to HKD. If UST traded above $1, users could acquire some LUNA and burn it for its dollar value in UST. Crucially, the system assumed that UST was worth $1, so the LUNA burner can just sell the UST on the market for, say, $1.01 and make a profit. They can then recycle the profits into LUNA, burn it again, and continue the cycle. Eventually, the peg would be restored."

"From the beginning, crypto experts were skeptical that an algorithm would keep Mr. Kwon’s twin cryptocurrencies stable. In 2018, a white paper outlining the stablecoin proposal reached the desk of Cyrus Younessi, an analyst for the crypto investment firm Scalar Capital. Mr. Younessi sent a note to his boss, explaining that the project could enter a “death spiral” in which a crash in Luna’s price would bring the stablecoin down with it."

Mr. Kwon dismissed concerns with a taunt: “I don’t debate the poor.” "In July, Kwon mocked a British economist who criticized the so-called algorithmic stablecoin model." "Frances Coppola tweeted saying self-correction mechanisms — of the sort used by TerraUSD, also called UST — will fail when panicking investors are stampeding for the exit." Kwon replied: "I don't debate the poor on Twitter, and sorry I don't have any change on me for her at the moment."

Death Spiral Bonds

The redemption mechanism of using ... is often referred to as a death spiral bond.

Similar Ponzi Scheme Protocols

While the interest rate on the Anchor protocol was not as high as in some other protocols, the perpetual minting of additional Terra was set up to create an increasing obligation on the protocol liquidity.

What Happened

In May 2022, TerraUSD and Luna experienced a collapse, leading to significant losses in the crypto market. TerraUSD and Luna collapsed in May 2022, wiping out almost $45 billion market capitalization in one week and causing hundreds of billions in losses in the larger crypto market. Kwon faces legal and social pressure regarding his role in the Terra crash.

"The coin's price fell from $116 in April to a fraction of a penny at the time of writing. Such an implosion has been seen in small-cap memecoins in the past, but never for something the size of luna, which had a market cap of over $40 billion just last month."

"Update – the LUNA crash continued a further 99%, then again, and finally another 90% drop to reach $0.00000112 against BUSD (Binance USD), the last trading pair to not be delisted by crypto exchanges." By "the evening of May 19, [TerraUSD (UST)] was trading for $0.083." "The crash wiped out the savings of untold numbers of investors overnight." "From May 9 to May 13, at least $55 billion of market cap disappeared, causing colossal losses to many investors."

Key Event Timeline - Luna Terra Algorithmic Stablecoin Crash

Date	Event	Description
January 2018	Terra Network Launch Plans	"Do Kwon and Daniel Shin launch the Terra network with plans to develop Chai, an e-commerce payments application, and to create a price-stable cryptocurrency against major fiat currencies to facilitate transactions. It is supported by the Terra Alliance, 15 large e-commerce companies in Asia." TBD review messari link.
April 20th, 2018	Cyrus Younessi Concerns	Cyrus Younessi, as research analyst for Scalar, describes that the Luna "project isn't gonna work" and "it seems to [him] that terra suffers from the death spiral". He references the Nubits stablecoin collapse as a historic example.
April 23rd, 2018	Terraform Labs Incorporated	"April 23: Terraform Labs, the firm that develops the Terra blockchain, is incorporated in Singapore."
January 30th, 2019	Luna Initial Coin Offering	"an. 30: LUNA is sold via an initial coin offering to investors. Terraform labs charged 18 cents per token during a seed round, and 80 cents per token during a private sale.
April 2019	Terra Mainnet Live	April: Do Kwon and several co-authors publish the Terra Money white paper. The Terra mainnet went live.
November 6th, 2019 6:30:04 AM MST	Forbes Top 30 Under 30	Do Kwon is recognized on Forbes Top 30 Under 30 list. "Kwon cofounded Terra to use blockchain technology to develop a more efficient payment system. Its eponymous price-stable cryptocurrency, or stablecoin, attracted 40 million users to work with the company at launch in January 2018. With the aim of building a blockchain-based payment system, Terra has raised $32 million from crypto-giants such as Binance, Arrington XRP and Polychain Capital, as well as assembling an alliance of commerce partners including Korean ticketing giant Ticketmonster and travel service Yanolja."
February 24th, 2020	First Luna Staking Product	"Feb. 24: A South Korean crypto exchange launches the first LUNA staking product. " TBD "
July 26th, 2020	Anchor Protocol Introduced	"July 6: Nicholas Platt, the head of research at Terra, introduces the Anchor protocol, a platform built on Terra that lets investors earn a high yield on their deposits and also borrow against their crypto holdings."
September 21st, 2020	Public Announcement of UST Stablecoin	"Sept. 21: UST, the Terra blockchain’s stablecoin, is publicly announced, with plans to launch on Ethereum and Solana." TBD
December 3rd, 2020	Mirror Launches	"Dec. 3: Terra’s synthetic stock protocol, Mirror, launches."
July 1st, 2021 12:51:00 AM MDT	Do Kwon Doesn't Debate The Poor	Do Kwon responds to economist Frances 'Cassandra' Coppola, who is concerned about the potential of a collapse after investors panic that "I don’t debate the poor on Twitter, and sorry I don’t have any change on me for her at the moment."
September 14th, 2021 9:44:11 AM MDT	Coin Bureau Video About UST	Coin Bureau publishes a video about why the Luna cryptocurrency is driven by demand for the Terra stablecoin.
September 21st, 2021	Do Kwon Subpoena From SEC	"Sept. 21: The U.S. Securities and Exchange Commission subpoenas Terraform Labs founder Do Kwon with concerns that Mirror may violate federal securities law."
October 25th, 2021	Do Kwon Sues The SEC	"Terra founder Do Kwon files a lawsuit against the U.S. SEC."
November 28th, 2021 3:04:00 AM MST	Do Kwon Dismisses Attack Possibility	"Nov. 28: Do Kwon rules out the possibility of a George Soros-style attack on UST/LUNA that could send it into a death spiral. Some would later, in mid-2022, claim this is the type of scenario that actually spurred Terra's demise."
December 22nd, 2021 12:49:00 AM MST	Luna Price Recorded Above $90 USD	"Dec. 22: LUNA’s price nearly doubles to record highs above $90, and is up 58% this month."
January 4th, 2022 6:18:50 PM MST	Mike Novogratz Is A Lunatic	Mike Novogratz proudly shows off his new Luna tattoo, courtesy of Smith Street Tattoos.
January 9th, 2022	Luna Foundation Guard Non Profit Founded	The Luna Foundation Guard (LFG) is officially formed as a non-profit organization to support the UST peg amid volatile market conditions.
January 19th, 2022 5:30:00 PM MST	Luna Foundation Guard Announced	"Jan. 19: Do Kwon announces the launch of Luna Foundation Guard, an organization “mandated to build reserves supporting the $UST peg amid volatile market conditions” and also “allocate resources supporting the growth and development of the Terra ecosystem” through grants." TBD - Did the tweet really get posted as REDACTED?
January 21st, 2022 9:00:00 AM MST	CryptoNews Article Published	CryptoNews reports on the founding of the Luna Foundation Guard.
February 22nd, 2022	Luna Foundation Guard Raises A Billion Dollars	The Luna Foundation Guard (LFG) raises $1b USD through the sale of Luna, which will be used to support the UST peg. "eb. 22: Singapore-based Luna Foundation Guard (LFG) raises $1 billion through the sale of LUNA tokens to buy bitcoin for UST’s reserve system, with Jump Crypto and Three Arrows Capital being the lead investors. "
March 13th, 2022 1:52:33 PM MDT	Terra/Luna Mentioned In Beanstalk Post	The Terra UST system is mentioned in a comparison with Beanstalk Finance. TBD more thought about how this fits with the rest of the wiki.
March 13th, 2022 2:20:00 PM MDT	Algod Poses Large Bet In Luna Price Decrease	"March 13: Crypto trader Algod, who likens UST/LUNA to a Ponzi scheme, bets $1 million against Do Kwon that the price of LUNA will be below $88 by March of next year.
March 14th, 2022 5:43:00 AM MDT	GiganticRebirth Matches Large Bet	Another crypto trader, GiganticRebirth, bets $10 million against Kwon that LUNA will be below $88 by next year.".
March 21st, 2022 11:42:39 AM MDT	Mentioned in YouTube Video	The Terra/Luna stablecoin is mentioned in a YouTube video. TBD more details about this. Relevance...
March 22nd, 2022 10:54:00 PM MDT	By My Hand DAI Will Die	"March 23: Do Kwon tweets “By my hand DAI will die” as he begins in earnest plans to starve off decentralized stablecoin DAI’s liquidity on Curve." TBD description
March 23rd, 2022 12:40:10 PM MDT	Jump Trading Bitcoin Reserve Proposal Submitted	"March 23: Jump Trading, one of the investors behind LFG, proposes a mechanism for how to deploy the bitcoin (BTC) reserves to prop up UST’s price in a crisis." The executive summary presents a community proposal for deploying Bitcoin reserves to defend the UST peg. The proposal suggests creating a reserve pool that provides rapid BTC liquidity to support UST during downward peg deviations. The pool would operate similarly to the LUNA <> UST on-chain mechanism but with distinct architecture and parameters. The reserve model aims to deploy liquidity during crises and to be simple and operationalizable. Retail traders would access the pool at a discount, initially exchanging 1 UST for $0.98 in BTC, providing a backstop for UST during a crisis. After the crisis, external traders could purchase UST with BTC, draining the accumulated UST from the pool. The model assumes robust private markets for UST and expresses liquidity on decentralized and centralized exchanges. The reserve mechanics involve forking the virtual AMM for the LUNA <> UST mechanism, with differences in asset delivery/holding and parameterization for entry and exit flows. The proposal recommends asymmetrical parameters to split UST → BTC and BTC → UST flows and defend against oracle attacks. The parameters include BasePool, PoolRecoveryPeriod, and MinSpread. Empirical assessments are provided for exit flow parameters, indicating the available liquidity and slippage rates. Similarly, entry flow parameters are discussed based on desired replenishment of BTC in the reserve after a crisis. The section also addresses oracle attacks, including stale oracles and manipulated oracles, proposing strategies to protect against them. The implementation of daily BTC redemption caps is suggested as an additional safeguard. Community input is sought for further guidance and discussion.
March 25th, 2022 4:47:00 AM MDT	Speculation About BTC Purchases and Limited Reserves	"March 25: Rumors emerge that LFG purchased bitcoin worth $125 million (2,840 BTC at the time)." There is speculation on Twitter and other media platforms that LFG only purchased 2,840 BTC (worth $125m USD).
March 28th, 2022	Luna Foundation Guard Reserves Proven On Chain	Over the past six days, the Luna Foundation Guard’s bitcoin wallet address purchased more than 27,000 BTC worth roughly $1.3 billion. CoinDesk reports that Bitcoin (BTC) has experienced a surge in price, surpassing $47,000, as it attempts to reverse a bearish trend. This rally is accompanied by increased interest in alternative cryptocurrencies (altcoins), with Ether (ETH) and Solana's SOL token also seeing significant gains. The recent rise in bitcoin's price is attributed to new token accumulation, particularly by the Luna Foundation Guard, which purchased over 27,000 BTC worth approximately $1.3 billion. The Luna Foundation Guard is adding bitcoin as an additional layer of security for UST, Terra's decentralized stablecoin. Do Kwon publishes confirmation of the LFG wallet address, showing that the foundation purchased over 27,000 BTC worth $1.3b USD.
March 28th, 2022 8:38:00 PM MDT	Three Arrows Capital Tweet	"March 29: Kyle Davies, co-founder of influential trading firm Three Arrows Capital, tweets, “Grandpa, what was the world like when $LUNA was less than three digits?”"
March 28th, 2022 11:45:00 PM MDT	All Time High For Luna	CoinDesk reports that terra’s LUNA token rose 10% in the past 24 hours to set new all-time highs of almost $106. The price reaches $105.91. This surpasses a previous high of $104.74 set earlier in the month. The sentiment for LUNA has been growing, attributed to the Luna Foundation Guard's (LFG) purchase of over $3 billion worth of bitcoin as an additional security layer for UST. This demand for bitcoin has contributed to a recent recovery in its price. LUNA's remarkable performance is highlighted, rising by 86,215.7% from its all-time low in March 2020, and it currently holds a market capitalization of $37 billion, making it one of the top cryptocurrencies.
March 30th, 2023	Luna Foundation Guard Bitcoin Purchase	"arch 30: LFG purchases 5,773 BTC, worth $272 million, this week. "
April 7th, 2022	Luna Foundation Guard Purchases Avalanche Too	The Luna Foundation Guard adds $100m USD worth of Avalanche (AVAX) to the UST reserve.
April 8th, 2022 12:25:00 PM MDT	Concern Over Protocol Exit Liquidity	Laura Shin interviews Kevin Zhou about his concerns over the drop in Anchor protocol yields. He believes $4-$5b worth of liquidity will exit the Luna protocol.
April 11th, 2022	Luna Foundation Guard Reaches Peak Reserve	The Luna Foundation Guard has a peak bitcoin reserve of 39,897 BTC, which is presently valued at $1.7b USD.
April 16th, 2022 7:26:00 PM MDT	Baby Luna Named	Do Kwon announces that he is naming his daughter "Baby Luna" after his "greatest invention", and furthermore if he has a son, he will name him "Stable".
April 18th, 2022 8:44:00 AM MDT	Response To Wall Street Journal Article	Do Kwon responds to a Wall Street Journal article "Cutting-Edge Crypto Coins Tout Stability. Critics Call Them Dangerous". He also reports that nobody at the Wall Street Journal reached out to him for an interview.
April 19th, 2022	UST Officially Third Largest Stablecoin	The UST/Terra stablecoin is officially the third largest stablecoin in the world.
May 8th, 2022	Anchor UST Deposits Fall	The total UST deposits of Anchor fall from $14b USD to $11.2b USD. There is $150m UST withdrawn from a liquidity pool on Curve by Terraform labs in anticipation of starting a set of new liquidity pools (4pool). A single wallet sells $84m UST on Ethereum and $108m USD on Binance smart chain. This brings UST to a low point of $0.985 USD.
May 9th, 2022	Second Time UST Loses Peg	Anchor deposits continue to drop, falling below $9b USD. The UST stablecoin loses it's peg, falling as low as $0.35 USD. The UST price remains highly volatile, achieving a height of $0.90 USD before continuing to drop.
May 11th, 2022 8:20:00 AM MDT	GFinity Esports Article Published	GFinity ESports reports that Terra's Luna cryptocurrency has experienced a significant crash in its price, falling by 90% to $3.18. The stablecoin associated with Luna, UST, also lost its peg and dropped by 48% to $0.48. UST is an algorithmic stablecoin that relies on the burning and minting of Luna and UST tokens to maintain price equilibrium. However, a large amount of UST was dumped, causing it to depeg and leading to a panic sell-off. This resulted in more Luna being minted and increased its circulating supply, further driving down the price. Additionally, Binance temporarily halted Luna and UST withdrawals due to network congestion. Despite these challenges, Luna has shown some recovery and is currently trading above $3.
May 11th, 2022 9:11:03 AM MDT	Price of Bitcoin Exceeds $100k	A post on Reddit notes that the price of bitcoin is now past $100k when measured in UST stablecoins.
May 11th, 2022	Main Event	Expand this into a brief description of what happened and the impact. If multiple lines are necessary, add them here.
May 11th, 2022 5:26:00 PM MDT	Do Kwon Clip Shared	Twitter user EncryptedPedro shares a clip of Do Kwon stating that "95% are going to die [coins], but there's also entertainment in watching companies die too" 8 days prior to the collapse. TBD - Can we find the original clip and specific time it happened?
May 12th, 2022 2:23:07 AM MDT	Business 2 Community Article	TBD explore more.
May 12th, 2022 9:41:00 AM MDT	Markets Insider Article	Markets Insider reports that TerraUSD founder Do Kwon is facing criticism as his cryptocurrency projects, TerraUSD and Luna, are experiencing a collapse in confidence and value. Kwon has a history of dismissing critics by labeling them "poor." Recently, he mocked an economist who criticized TerraUSD's design, stating that he doesn't "debate with poor people." The TerraUSD stablecoin has fallen significantly, with luna token plunging 99%. Kwon's habit of putting down detractors is garnering attention as his projects face turmoil. Analysts are expressing skepticism about the legitimacy of these assets, emphasizing the preference for real, tangible assets amid disappearing liquidity and inflation.
May 12th, 2022	Terra Blockchain Officialls Halted	The Terra blockchain is officially halted following sharp drops in the Luna price. Luna falls 96% in one day and is now below $0.10 USD. The Luna supply hyper-inflates to support the UST peg, which results in a "death spiral".
May 12th, 2022 3:33:26 PM MDT	Fortune Video Published	Fortune publishes a video on the Terra/Luna crash.
May 12th, 2022 6:31:00 PM MDT	Cyrus Younessi Shares Tweet	Cyrus Younessi shares his original discussions on the Terra project. It's unclear if he had anything to share prior to the collapse. "I've actually suffered some copium over the years because of Terra's "success." I'm not happy about how it turned out but I am pleased to be vindicated. "
May 13th, 2022 4:15:00 PM MDT	Do Kwon's Heartbreak	Do Kwon announces on Twitter that he's "heartbroken about the pain my invention has brought" to "Terra community members – builders, community members, employees, friends and family, that have been devastated by UST depegging".
May 16th, 2022 10:55:51 AM MDT	Mint Article Published	An article about the situation is published by Mint. TBD fill in description.
May 16th, 2022	Entire BTC Reserve Depleted	The Luna Foundation Guard confirms that the entire BTC reserve has now been depleted in an attempt to support the UST peg. Do Kwon proposes to fork Terra without the UST stablecoin and rebuild the whole project.
May 17th, 2022 7:00:49 AM MDT	How It Happened Episode Video	The YouTube "How It Happened" channel published a video with more information on the Luna/Terra collapse. Last week witnessed a major market crash in the cryptocurrency world, impacting Bitcoin, Ethereum, Coinbase, and Binance. The crash was triggered by the stablecoin Terra USD (UST) losing its peg to the US dollar, which caused its non-stable coin partner, Luna, to plummet by 99% within a few days. The crash resulted in around $200 billion being wiped off the total value of all cryptocurrencies. Notably, popular YouTuber KSI lost nearly $3 million in the Terra Luna crash. Terra is a stablecoin linked to the dollar through algorithms and game theory, while Luna acts as its satellite asset. However, a major sell-off and withdrawal attempts overwhelmed the algorithms, leading to the Luna Foundation selling its Bitcoin reserves to save the stablecoin, causing a ripple effect on the entire market. The Terra Luna crash raises concerns about the stability and reliability of stablecoins and highlights the potential risks associated with algorithmic stablecoins. The incident also questions the legitimacy and sustainability of the cryptocurrency market as a whole, drawing parallels to a Ponzi scheme. The future of Terra Luna and its ability to regain trust and stability will depend on its response to the crisis and its ability to prevent similar incidents in the future.
May 18th, 2022 3:00:43 AM MDT	The New York Times Article	The New York Times publishes an article on the collapse about "How a Trash-Talking Crypto Founder Caused a $40 Billion Crash".
May 18th, 2022 10:15:00 AM MDT	Beanthoven Publishes Symphony	Twitter user Beanthoven, from stablecoin protocol Beanstalk Finance, composes a symphony for affected users of Terra/Luna. Their protocol had also suffered a recent loss through a different mechanism.
May 19th, 2022 11:08:37 PM MDT	Kalkine Media Report on YouTube	Kaline Media publishes a general overview of the stablecoin collapse, covering both TerraUSD (UST) and DEI . Stablecoins, a category of cryptocurrencies designed to maintain a stable value, have been experiencing a significant dip in value, causing concern within the crypto community. Stablecoins are typically pegged to assets like fiat currency or precious metals, with the expectation that their value will remain constant. However, both prominent stablecoins have lost their peg, triggering negative sentiment. DEI is part of the DEUS Finance project, which aims to be a decentralized finance ecosystem offering services such as crypto loans. DEI is supposed to maintain a peg with the US dollar but has recently suffered a substantial loss, losing over 25% of its value in one day. Similar to TerraUSD, the fall of DEI may be linked to issues with how algorithmic stablecoins maintain their reserves to back the asset. This instability in stablecoins has raised concerns about the reliability of these types of cryptocurrencies.
May 20th, 2022 4:51:47 AM MDT	Al Jazeera Article Published	Al Jazeera publishes an article on the Terra/Luna situation. According to the article, the collapse of the TerraUSD (UST) and Luna coins, which erased about $45bn in wealth overnight, has prompted regulators to consider the need for tighter frameworks around cryptocurrency projects. Hank Kennedy, a factory worker in Chicago, said the crash had wiped out his $40,000 savings and left him behind on bills. US Treasury Secretary Janet Yellen has called for regulation of stablecoins by year-end. Former lawyers at the Securities and Exchange Commission say the agency is likely to be investigating the case. South Korean and Singaporean authorities have launched emergency investigations into the crash.
May 20th, 2022 7:06:54 AM MDT	ColdFusion Video Explaining Collapse	In this episode of "Cold Fusion," a story is narrated about a person who is introduced to a website called Terraform Labs, offering low-risk investments with a 20% annual return using stablecoins. Skeptical at first, the person eventually decides to invest but ends up losing half of their savings in just two years. The episode introduces Do Kwon, the person in charge of Terraform Labs, and traces his journey from studying computer science at Stanford to starting Terraform Labs. The company gained support from e-commerce companies in Asia and experienced rapid growth. However, issues with the stability of the system and the fixed 20% yield led to its collapse and the loss of billions. Despite criticism and warnings, Terra had gained popularity and was being used in decentralized apps worldwide. The episode highlights the centralized nature of the system and Kwon's confidence, which later proved to be misplaced.
May 20th, 2022 4:26:28 PM MDT	Benzinga Article Explains Crash	Benzinga publishes an article attempting to explain the crash. They report that the native cryptocurrency of the Terra Ecosystem, LUNA, has dropped over 99.9% since its crash, falling from a top 10 cryptocurrency by market capitalisation to currently ranked around #100 globally. Terra is a blockchain network that specialises in stablecoin creation, with stablecoins pegged to the U.S. dollar, South Korean won, and euro, among others. Tokens in Terra's ecosystem are represented by two token types: LUNA and a family of Terra stablecoins. LUNA is Terra's native token and plays four different roles in the Terra Protocol. LUNA crashed after over $2 billion worth of UST was unstaked from the Anchor Protocol, and hundreds of millions of that was immediately sold. The reasons behind the collapse, whether it was in response to a particularly volatile period, the fact that rising interest rates had affected the broader cryptocurrency market or a malicious attack on Terra's ecosystem, is an ongoing topic of debate. TBD need to add more information on the article revisions over time.
May 23rd, 2022 5:31:19 AM MDT	NDTV Article Published	The price of TerraUSD recovers to $0.08003, and Luna price rises to $0.0001949, according to an article is published by NDTV. The article also covers over an estimate of the loss as $42b USD and mentions five criminal complaints being filed against Do Kwon by South Korean investors.
May 23rd, 2022 8:00:13 AM MDT	CNA Insider YouTube Video	CNI Insider publishes a video on the Terra/Luna collapse as part of their Money Mind video series. The recent crash of the Terra (UST) stablecoin and its impact on the crypto market is examined. Unlike stablecoins backed by currency reserves, UST was backed by an algorithm linked to its sister token Luna. UST's price rose significantly due to the Anchor platform, offering a 20% yield to users who bought UST and lent it to the protocol. However, the crash resulted in UST de-pegging from the dollar and caused Luna's value to plummet. The crash affected other stablecoins and even Bitcoin. Critics argue that algorithmic stablecoins can't maintain stability during downturns. Experts suggest the need for regulation, real economy reserves, and investor protection in the crypto market.
May 25th, 2022 6:00:00 AM MDT	CNET Article Published	CNET reports that the collapse of the Luna cryptocurrency and its associated stablecoin, UST, has caused turmoil in the cryptocurrency market, wiping out over $17 billion in crypto value and raising concerns about stablecoins. Luna's price fell from $116 in April to just 3 cents, resulting in substantial losses for investors. The UST stablecoin, which is not backed by actual US dollars but uses algorithmic mechanisms to maintain its peg, was depegged and its price dropped to 7 cents. The collapse has caught the attention of politicians and regulators, leading to discussions about the regulation of stablecoins. The company behind UST plans to build a new blockchain without a stablecoin. TBD - There may have been an earlier version of the article on May 12th.
May 28th, 2022	New Terra Blockchain Goes Live	A new Terra blockchain goes live, and the old chain is rebranded as "Terra classic".
May 31st, 2022	Price Update	The price of UST is $0.02475 USD, and the price of Terra Classic (LUNC) is $0.0001209 USD. The supply of LUNC has now increased to 6.9 trillion (from an original supply of 3.5 billion on February 4th).
June 1st, 2022 9:37:46 AM MDT	CoinDesk Publishes Terra/Luna Timeline	CoinDesk publishes their initial summary of the Terra/Luna timeline. The article provides a detailed timeline of Terra's journey, starting as a payments app in South Korea and growing into a $60 billion crypto ecosystem before experiencing a major failure. CoinDesk closely followed the rise and fall of the Terra ecosystem, documenting Do Kwon's vision, Terra's growth as a red-hot crypto project, and Do Kwon's controversial actions on social media. Ultimately, the collapse of the ecosystem resulted in the loss of investments for many individuals. The article concludes by noting that the timeline will be updated as the story develops further.
June 1st, 2022 3:53:19 PM MDT	VettaFi Advisor Perspective Published	According to an article from VettaFi, the collapse of TerraUSD has shed light on the instability of stablecoins, digital tokens tied to government-issued currencies. While the collapse did not have significant repercussions in the traditional financial system, it highlights the need for regulatory measures. Stablecoins were initially created to facilitate speculation and provide a stable haven for funds between volatile cryptocurrency bets. However, they lack reliability and transparency, with some issuers holding risky assets as reserves. Unregulated stablecoin issuers pose systemic risks, and therefore, they should be recognized as special-purpose banks and subject to strict regulations, including limits on investments and capital requirements. The US Treasury Department has already outlined the necessary steps, and lawmakers are working towards bipartisan support for regulatory changes to prevent stablecoins from triggering future financial crises.
June 2nd, 2022 7:00:28 AM MDT	Lai Yuen Reflects on The Crash	Lai Yuen was a 25 year old graduate and co-president of the NUS Fintech Society. He got into cryptocurrency in 2018 and experienced a small loss during that cycle. Hi invested in Terra (Luna) in February2021 and had a significant portion of their holdings locked up during the crash. This resulted in substantial losses, and they regret not adhering to their safety limits. The popularity of Terra stemmed from retail adoption and peer pressure, with many people investing their life savings based on the belief in high yields. The individual emphasizes the need for more education in the space and proper risk assessment. While regulatory risks and regional developments have set the crypto space back, the individual remains hopeful about the future of cryptocurrencies as an asset class, particularly for the younger generation.
June 8th, 2022 8:18:00 AM MDT	Allegations Celsius Caused Collapse	CoinYar publishes an article speculating on whether the Terra/Luna collapse was triggered by Celsius withdrawals. According to the article, the collapse of Terra/LUNA cryptocurrency may not have been a deliberate attack but rather a result of natural market forces, according to theories surrounding the event. The collapse was initially thought to be a deliberate attack, but blockchain analytics firm Nansen's on-chain study suggests that it was caused by poorly designed algorithmic stablecoin and imbalances in liquidity protocols. One of the wallets allegedly involved in triggering the collapse belonged to Celsius, a cryptocurrency lending platform. Celsius defended itself by stating that it removed its assets from the platform to protect its customers' money and did not profit from the instability. The incident highlights the complexities of decentralized finance (DeFi) and the concerns of regulators regarding its impact on investors and the financial system.
June 9th, 2022 11:52:00 AM MDT	Watcher.Guru Breaking News	Watcher Guru reports that "Terra employees reportedly confirmed to the SEC that Do Kwon cashed out $80 million a month prior to the $LUNA and $UST crash." According to reports by South Korean news agencies Naver and JTBC indicate that the US Securities and Exchange Commission (SEC) is investigating Do Kwon, the founder of blockchain-based payment network Terra, for alleged money laundering activities. The investigation reportedly revealed that $80m of Terra's funds were sent to different wallets for operating expenses each month prior to the platform's collapse. The SEC is also said to be looking into Terra's violation of the Securities Act in allowing US equities to be purchased through the service.
June 10th, 2022 9:40:00 AM MDT	The Street Reports SEC Investigation	The Street reports an update on the situation. Terraform Labs and its co-founder and CEO Do Kwon are being investigated by the Securities and Exchange Commission (SEC) and South Korean authorities after the collapse of the UST and Luna tokens. Employees have told the SEC that Kwon was cashing out $80m per month prior to the crash. The SEC is investigating whether the marketing of UST before it crashed violated federal investor protection regulations. Algorithmic stablecoins like UST are backed not by dollar reserves but rather by their sister assets, such as Luna. Kwon has proposed a new chain to replace the existing Terra network, while Luna 2.0 will replace the existing version of Luna.
June 12th, 2022 10:00:00 AM MDT	The Hindu Article Published	The Hindu published an critical article on the Terra/Luna situation. The recent crash of Terra-Luna in May 2022, which caused digital coin values to plunge and rendered some almost worthless, is a stark reminder of the inherent volatility of cryptocurrencies, and how they are nothing more than insubstantial digital "bits" created by speculators for speculation. Since the creation of the first bitcoin in 2009, privately generated cryptocurrencies have failed to offer an alternative to government-backed and regulated fiat currencies, and are hardly used in routine economic transactions. Instead, they serve as virtual instruments for speculators to place costly bets and have consequently remained volatile. Despite the growing popularity of digital assets, crypto critics are calling for them to be banned or severely regulated, as what happens in the crypto world affects the decisions of those in the regular economy.
June 15th, 2022 10:58:00 AM MDT	Finance Feeds Article on Terra 2.0	Finance Feeds publishes an article on the Terra/Luna situation. They report that the recent crash of LUNA and UST stablecoin, which resulted in the loss of thousands of investors' money, has prompted Terraform Labs to launch Terra 2.0, a revived version of the original Terra blockchain. The crash was caused by the link between LUNA and the algorithmic stablecoin, TerraUSD (UST), which saw a large amount of UST being dumped, causing it to de-peg and leading to excessive mining of LUNA. The new LUNA 2.0 has a total locked supply of 1.0 billion, with 35% of new tokens being airdropped to previous and existing LUNA holders. The article suggests that Terra 2.0 deserves a second chance as the Terra team has made continuous efforts and commitments to support the community and has implemented a revival plan that separates itself from the previous flawed concept.
June 16th, 2022 4:26:00 AM MDT	Finance Magnates Article Published	According to an article published by the Finance Magnates, blockchain security firm Uppsala Security has traced cryptocurrency funds linked to the collapse of Terra Luna to one of seven key wallets, labelled Wallet A. The firm's investigation revealed that the wallet was funded solely by Terra Mainnet and is connected to Terra Labs or the Luna Guard Foundation. One of the most significant actions of Wallet A was to exchange $85m of USDT for USDC at Coinbase, causing Terra Luna to spiral. Ben Samocha, co-founder of CryptoJungle and CryptoTalks, said the collapse was "ponzi-like" and said he believed Terra Luna would fail. TBD review wallet information for more to include
June 16th, 2022 6:23:10 AM MDT	Binance Lawsuit Over Terra Promotion	A cryptocurrency investor has reportedly filed a lawsuit against Binance and its CEO, alleging false advertising of TerraUSD as a safe asset prior to its collapse. The investor argues that Binance's lack of registration on the US securities exchange means they don't have to disclose information about the platform's assets. Binance denies the claims, stating that they are registered with the US Treasury Department's Financial Crimes Enforcement Network. The lawsuit seeks class action status on behalf of all TerraUSD investors who purchased the stablecoin from Binance.
June 22nd, 2022 10:34:58 AM MDT	Beanstalk Publishes Comparison	Decentralized stablecoin Beanstalk Finance publishes a comparison between their protocol and Terra following the collapse.
June 24th, 2022 10:58:00 AM MDT	Contemplation of Terra Lawsuit	A CoinDesk article describes some basis by which affected users might pursue a lawsuit against the Terra blockchain founders. Such a case is challenging, since the operation of the protocol was transparent to all participants. TBD fill in more details.
September 7th, 2022 5:39:00 AM MDT	GFinity Esports Article Updated	GFinity Esports provides an updated perspective on the Luna cryptocurrency crash, which they originally reported on when it occurred in early May. The price of Luna has now plummeted by 99.9% to $0.000091, while the stablecoin TerraUSD (UST) has also experienced a significant decline. The crash was caused by a large amount of UST being dumped, leading to depegging and panic selling. The Luna Foundation Guard attempted to save UST from depegging by purchasing Bitcoin but was unsuccessful. Following the crash, Luna and UST pairings were delisted from several crypto exchanges, and Luna's recovery plan, including the introduction of Luna 2.0, has had mixed results. The article highlights the impact of the Luna crash on the wider cryptocurrency market and raises concerns about stablecoins, particularly algorithmic stablecoins.
December 22nd, 2022 2:07:00 PM MST	CoinDesk Timeline Updated	The CoinDesk timeline is updated. TBD - Need to finish sorting this timeline and integrating.
March 23rd, 2023	Do Kwon Arrested
April 24th, 2023 5:30:00 AM MDT	Not A Security in South Korea	According to an article by CoinTelegraph, a South Korean district court ruled that the native token of the LUNA ecosystem, LUNA, is not a security under Korea's Capital Markets Act. The court dismissed charges of security violations against former Terraform Labs CEO and co-founder Hyun-seong Shin. The ruling stated that it is difficult to consider LUNA as a financial investment product regulated by the Capital Markets Act. The court rejected the prosecution's appeal for confiscating Shin's properties and his arrest based on securities law violations. The judgment categorizes the Terra-LUNA case as fraud and breach of trust rather than a violation of the Capital Markets Act. However, the prosecution has appealed to the Supreme Court against the verdict. The ruling contrasts with the stance of the United States Securities and Exchange Commission, which has charged Terraform Labs and its founder with securities law violations.

Technical Details

TBD

Options For Investors During The Collapse

GreyThorn published their summary of the options avialable to investors during the collapse period:

From May 8 to May 9 , with significant outflows of UST from Anchor, an investor who wanted to cut their exposure to this situation had three courses of action:

Use the algorithmic minting mechanism to burn 1 UST for $1 worth of LUNA

Swap UST for another stablecoin using Curves 3CRV liquidity pool (which had $550M of liquidity)

Deposit UST onto a centralised exchange and sell for another asset.

Concerning option 1, the reserves for the mechanism were capped at 300M per day out of the $2B in total reserves. As such, when many users attempted to activate the mechanism to realise the arbitrage opportunity, they found it impossible to do so.

Concerning option 2: In preparation for the launch of the 4CRV liquidity pool, the supply of alternative stablecoins in the 3 CRV pool was lower than usual. As a result, the pool could not absorb the sell volume, with UST becoming 95% of the pool. Billions of UST were therefore forced onto centralised exchanges to be sold.

This left option 3 as the only means by which investors could swap out of their UST positions. This situation led to massive selling pressure causing UST to significantly de-peg. While UST did experience significant intra-day liquidity (even rising to the low $0.9 mark), significant sell orders below the $1 peg led to UST being unable to recover its peg after May 9.

Total Amount Lost

The total amount lost has been estimated at $55,000,000,000 USD.

Immediate Reactions

Do Kwon on Twitter

Do Kwon tweeted to the community shortly after the Terra/Luna started collapsing.

I’ve spent the last few days on the phone calling Terra community members – builders, community members, employees, friends and family, that have been devastated by UST depegging.

I am heartbroken about the pain my invention has brought on all of you.

I still believe that decentralized economies deserve decentralized money – but it is clear that $UST in its current form will not be that money.

Neither I nor any institutions that I am affiliated with profited in any way from this incident. I sold no luna nor ust during the crisis.

We are currently working on documenting the use of the LFG BTC reserves during the depegging event. Please be patient with us as our teams are juggling multiple tasks at the same time.

There are multiple proposals on Agora on the best steps to move forward for the community – after having read many of them, I’ve put down my thoughts of what I think the best steps are.

What we should look to preserve now is the community and developers that make Terra’s blockspace valuable – I’m sure our community will form consensus around the best path forward for itself, and find a way to rise again.

Reddit Critical Reception

A Reddit thread pointed out the situation, claiming that bitcoin had now hit a price above $100k based on the UST trading pair.

Well boys and girls, we did it! We got BTC over $100K. Many thought we'd have to wait until the next halvening before we saw the 6-figure price, once again, Big Daddy Bitcoin surpises us. We have reached the psychological threshold amidst a market crash. As you'll see in the picture below, the BTC/UST pair reached a high of nearly $138K.

Lai Yuen Reflections

Lai Yuen was a 25 year old graduate and co-president of the NUS Fintech Society. He got into cryptocurrency in 2018 and experienced a small loss during that cycle. Hi invested in Terra (Luna) in February2021 and had a significant portion of their holdings locked up during the crash. This resulted in substantial losses, and they regret not adhering to their safety limits. The popularity of Terra stemmed from retail adoption and peer pressure, with many people investing their life savings based on the belief in high yields. The individual emphasizes the need for more education in the space and proper risk assessment. While regulatory risks and regional developments have set the crypto space back, the individual remains hopeful about the future of cryptocurrencies as an asset class, particularly for the younger generation.

Brad Nickel, who hosts the cryptocurrency podcast “Mission: DeFi.”, "was savagely putting down detractors just days before TerraUSD, which was the world's third-biggest stablecoin and was supposed to trade at $1, tumbled as low as $0.30."

"Never have I expected it to happen so soon and so fast, but it narrows down to the bottom line: if the federal reserve’s fed funds rate was 0% (or close to it), how can one offer a 20% yield on an alleged pegged USD? It can only be done via a. someone paying for it, whether the company (i.e. Terraform Labs / Luna Foundation Guard) or new investors piling it (ponzi-like), or by taking enormous risks to try to obtain these yields via the open markets, which we know wasn’t the case."

"It worked, until it didn’t." "The 30 year old Do Kwon had something of a reputation on Twitter for arrogance, in some circles, so some think it may have been a personal attack as well." "Before the collapse, over $2 billion worth of UST was unstaked (taken out of Anchor Protocol), and hundreds of millions of that was immediately sold. Whether this action was in response to a particularly volatile period, the fact that rising interest rates had affected the broader cryptocurrency market or a malicious attack on Terra’s ecosystem is an ongoing topic of debate."

"One theory was put forward by the founder of Cardano Charles Hoskinson, although he later deleted the tweet."

"He tweeted that a large institution borrowed 100,000 Bitcoin from Gemini exchange. They then exchanged a large amount of that BTC for UST over the counter (OTC) with Do Kwon at a discount. He agreed, lowering the UST liquidity."

"That institution then allegedly dumped large amounts of both BTC and UST on the market causing a liquidation cascade of leveraged longs, slippage and panic selling by investors, many of which sold their LUNA holdings and unstaked their UST to sell it."

"The tweet alleges that Terra was a ponzi scheme that didn’t have enough BTC reserves on hand to prevent that crash. None of these claims are verified and Gemini denied issuing any such loan. However market manipulation is common in all financial markets."

"Hoskinson (@IOHK_Charles) later tweeted that even if Gemini’s tweet is accurate, someone did launch an attack on Terra. Who that was is unknown for now, and social media is rife with speculation and different explanations."

"At 21:44 GMT, Terraform Labs (TFL) withdrew $150 million in UST liquidity. This made the Curve pool relatively balanced, but much smaller."

"At 21:57, a relatively-inactive account ('Wallet A') swapped $85 million UST for USDC in this pool. (This was the largest swap transaction in that particular Curve pool ever.) Such an action pushed the Curve pool out of balance again."

"Moreover, Wallet A had transferred $108 million in UST to Binance earlier in the day, and these transfers coincided with elevated trading volumes at Binance and the worsening liquidity at Curve."

"This excessive mining led to a massive increase in LUNA’s circulating supply, thus crashing its price. The token’s circulating supply was around 345 million in April, which became 6.5 trillion on May 13th." "The Terra (LUNA) crypto token first crashed from $120 to $0.02, a 99.9% correction, of which 99% was within 48 hours of a black swan event on May 11th – 12th." "On May 7, the price of the then-$18-billion algorithmic stablecoin terraUSD (UST), which is supposed to maintain a $1 peg, started to wobble and fell to 35 cents on May 9."

"The Financial Times reported that the company held $3.5 billion worth of bitcoin in its reserves in a failed attempt to stabilize the price of UST." "The main problem that led to the fall of Terra was that the reserves appeared to be overcollateralized, but in reality, they weren’t." The designers said they "predicted the collapse of Terra and Luna and pointed out the danger to CEO Kwon Do-hyung several times, but they were ignored."

"Kathleen Breitman, a founder of the crypto platform Tezos, said the rise and fall of Luna and TerraUSD were driven by the irresponsible behavior of the institutions backing Mr. Kwon." “You’ve seen a bunch of people trying to trade in their reputations to make quick bucks,” she said. Now, she said, “they’re trying to console people who are seeing their life savings slip out from underneath them. There’s no defense for that.”

The "bank run on LUNA and UST and the ensuing “death spiral” that resulted could have been predicted, said [Ryan Clements, assistant professor at the University of Calgary Faculty of Law], who indeed warned of something like this in an October 2021 paper published in the Wake Forest Law Review."

“Specifically, they require ongoing demand, willing market participants to perform arbitrage and reliable price information. None of these are certain and all of them have been tenuous during times of crisis or heightened volatility.”

“An algorithmic stablecoin is very challenging,” Campbell Harvey, Duke University finance professor and co-author of DeFi and the Future of Finance, told Cointelegraph. “Every time you’re under-collateralized, you run the risk of a so-called bank run.”

"Much of the pain of the collapse has instead been felt by regular traders. On a Reddit forum for Luna evangelists, users shared lists of suicide hotlines, as people who had poured their savings into Luna or TerraUSD expressed despair."

“I felt my heart sink watching Luna go into that downward spiral,” Hank Kennedy, a factory worker in Chicago, told Al Jazeera. “It (the crash) has had a huge impact on my life.

“Now I’m behind on all my bills, and I’ve lost $40,000, which was everything I had in my savings,” Kennedy added. “I was actually thinking that I would be able to make enough money to pay my home off, but instead, I’ve lost everything.”

"Kwon wrote on Twitter last week that he was “heartbroken” about the pain his invention had brought investors and that neither he nor the companies associated with the project had sold UST or Luna to profit from the crash. The statements came after the founder earlier that day proposed a “revival plan” to restart the network and distribute ownership of the project via one billion new tokens issued to holders of the collapsed currency. Kwon and the Luna Foundation Guard did not respond to requests for comment before publication."

"I understand the last 72 hours have been extremely tough on all of you - know that I am resolved to work with every one of you to weather this crisis, and we will build our way out of this. Together." Kwon said on Twitter.

Charles Hoskinson Speculation

The founder of Cardano put forward a theory that 100,000 bitcoin were borrowed from the Gemini exchange by a large institution, exchanged for UST over the counter with Do Kwon at a discount, then later dumped both BTC and UST on the market.

Charles Hoskinson later tweeted that even if Gemini's tweet is accurate, someone did launch an attack on Terror.

Beanthoven Song Published

Beanthoven from Beanstalk Finance published "Song For Terra", "[a] song for our frens over at Terra. We've all had a rough time of it lately, hopefully this helps a little with the healing."

Ultimate Outcome

Lawsuits Filed

Kwon has faced legal and social pressure as a result of his role in the Terra crash, with legal actions being taken against him in various jurisdictions, including South Korea, Singapore, and the United States.

Arrest In Montenegro

In March 2023, Kwon was arrested in Montenegro while attempting to travel to Dubai using falsified documents. He has been charged by a US federal grand jury with multiple counts, including securities fraud, commodities fraud, wire fraud, and conspiracy. The collapse of Terra and the subsequent legal issues have resulted in class-action lawsuits being filed against Kwon and Terraform Labs by investors in South Korea and the United States. The US Securities and Exchange Commission (SEC) has also launched an investigation into Terraform Labs for potential violations of federal regulations.

TBD Review

"While most of our efforts had been spent on Terra 2.0 and making sure ecosystem developers can find a home after the depeg incident, we will soon be more proactive in communicating with the press & getting the right information out there," Kwon tweeted on June 9.

"There's a lot of misinformation and falsehood out there, and we promise to do our part in making sure as much of it is correct as possible," Kwon tweeted on June 9.

"The old Terra chain is renamed Terra Luna Classic. The new LUNA 2.0 has a total locked supply of 1.0 billion, which is significantly better than the 6.5 trillion supply of the classic token. 35% of the new tokens are airdropped to previous and existing LUNA holders. 10% of LUNA 2.0 is sent to those who held the token before the UST crash, and 25% is sent to those who still own LUNA Classic and UST. Another 30% is sent to a pool of LUNA investors."

Some praised the new chain. "While LUNA’s crash has significantly impacted the overall crypto industry and created worries for new entrants, we have to remember that it’s not an isolated event. Over the last few years, the crypto industry has seen its fair share of ups and downs. New tokens have emerged with glowing promise, only to fail miserably. Some due to project failures, some due to scams and rug pulls."

"One of the positives in the LUNA case was the continuous efforts and commitments of the Terra team. The team worked tirelessly to support the community in this crisis and implement a revival plan that actually separates itself from the previous mistakes." "The token had maintained consistent growth and correction even during the harshest of market conditions. The crypto community should value that Terra has admitted its mistakes, and the concept of Terra 2.0 shows that it has already started to move away from the previous flawed concept."

However, other articles disagreed. "I believe LUNA 2.0 is a joke and an insult to the investors who were hurt by this incident. The entire value proposition of LUNA itself was built around the UST ponzi, which obviously doesn’t exist in the 'new' protocol."

"I also believe investors and network participants have completely lost their trust in the network, and that it is irresponsible of exchanges and brokers to even allow the trading of this new coin and not simply a market just to get rid of it ASAP."

"Investigators in Seoul, South Korea, are also reportedly investigating Terraform Labs." "South Korean authorities launched an “emergency investigation” into the case. Investors in Singapore have filed police reports, although authorities have yet to make any move." “The government of Singapore is not going to be impressed that a firm registered in its country, with no real material ties to the city-state, has caused such damage to investors around the world,” Sam Reynolds, a Taipei-based crypto analyst at CoinDesk, told Al Jazeera.

"The incident epitomises regulators’ nightmare scenario of crypto projects going wrong and prompted US Treasury Secretary Janet Yellen to call for regulation of stablecoins – whose selling point is their supposed stability due to being pegged to another currency or commodity – by year’s end. Former lawyers at the Securities and Exchange Commission (SEC) say the agency is probably already investigating the case."

"Employees of Terraform Labs have reportedly told the Securities and Exchange Commission that Do Kwon, the company's co-founder and CEO, was cashing out $80 million a month prior to the crash of the UST and Luna tokens." The search engine Naver, citing South Korean television network JTBC, said the SEC "recently conducted a remote video survey of some of Terra's key designers and focused on inquiring about Terra's poor design structure."

"The United States Securities and Exchange Commission reportedly discovered a situation where $80 million dollars (100 billion won) of the company’s funds every month were sent to different wallets for the operating expense. This reportedly happened a few months before the collapse of Terra. This particular activity, according to the reports, is what raised money laundering suspicions about Do Kwon."

"The SEC reportedly found that about 100 billion won, or $78.1 billion, of company funds went out every month for operating expenses a few months before Terra collapsed." "The SEC has secured internal statements that "the funds flowed into dozens of cryptocurrency wallets," JTBC reported." "[T]he SEC is investigating whether the marketing of UST before it crashed violated federal investor protection regulations, according to Bloomberg."

Investor Trespassing Incident

In addition to the legal issues, there have been personal incidents involving Kwon, such as a trespassing incident by an investor who claimed to have lost a substantial amount of money and the invalidation of his South Korean passport.

Total Amount Recovered

There do not appear to have been any funds recovered in this case.

Ongoing Developments

TBD Review

"[These] events could even “chill” institutional and venture capital formation for stablecoin and DeFi projects, at least in the near term, suggested Clements. It will also likely hasten regulatory policy formation in the U.S. and internationally around all stablecoin forms, “identifying taxonomic forms, and distinguishing operational models.” This is needed because algorithmic versions of stablecoins “are not stable and should be distinguished from the fully collateralized forms.”"

“I think more regulatory clarity would need to be established before crypto-specific cooperation with countries could happen,” Reynolds said, referring to the continuing lawsuit between Terraform Labs and the SEC that seeks to establish if the financial watchdog has jurisdiction over the project.

"Even if the company were found liable, it is unclear whether it has the assets to repay investors."

“The question would be, what assets would Terraform Labs and the Luna Foundation Guard have to repay investors?” Reynolds said.

“The Luna Foundation Guard, with its current balance sheet, could only pay out pennies on the dollar. And aside from those balances, it is unlikely that Terraform Labs has material assets sufficient to pay out any claims against it in a meaningful way,” he added."

“Before this happens, we would also need a determination if the collapse happened because of fraud, negligence, a coordinated attack, or market rejection of the platform. Right now, that’s not clear.”

“I think we need to rethink what decentralisation means. What will happen next with Luna will not be based on any consensus formed among its community.”

"As regulators mull over their next move, the saga has offered industry players a moment of pause to reflect on what constitutes good governance and sound investing."

Legal Actions Against Do Kwon

Citizens from multiple jurisdictions including South Korea, Singapore, and the United States, are taking legal action against Do Kwon.

Arrest of Do Kwon

On 23 March 2023, Kwon was arrested in Montenegro, while attempting to travel to Dubai using falsified documents. Following his arrest, he was charged by a US federal grand jury of eight counts, including securities fraud, commodities fraud, wire fraud, and conspiracy.

Individual Prevention Policies

No specific policies for individual prevention have yet been identified in this case.

TBD partial completed prevention policies template?

The death spiral which occurred in Terra/Luna is not unique to that protocol, and had played out previously, including on protocols such as Basis Cash, which Do Kwon had been involved with. It comes from the fundamental ability for the protocol to mint an unlimited amount of Luna tokens, based on the current price, which has the ability to flood the market. Very limited information was provided and assessed on the risks of the protocol collapsing. There were a number of warnings prior to the collapse from multiple experts.

When using any third party custodial platform (such as for trading), it is important to verify that the platform has a full backing of all assets, and that assets have been secured in a proper multi-signature wallet held by several trusted and trained individuals. If this can't be validated, then users should avoid using that platform. Unfortunately, most centralized platforms today still do not provide the level of transparency and third party validation which would be necessary to ensure that assets have been kept secure and properly backed. Therefore, the most effective strategy at present remains to learn proper self custody practices and avoid using any third party custodial platforms whenever possible.

Avoid the use of smart contracts unless necessary. Minimize the level of exposure by removing or withdrawing assets whenever possible. Aim to choose smart contracts which have obtained third party security audits, preferably having been audited by at least three separate reputable firms. Pay attention to the audit reports, which smart contracts are covered, and whether the smart contract has been upgraded or modified since the report. Ensure that any administrative functions with the ability to remove funds from the smart contract are under the authority of a multi-signature wallet which is controlled by at least three separate and reputable entities.

For the full list of how to protect your funds as an individual, check our Prevention Policies for Individuals guide.

Platform Prevention Policies

Policies for platforms to take to prevent this situation have not yet been selected in this case.

There were a number of warnings prior to the collapse from multiple experts. There were limited expert opinions sought prior to launching the protocol and any attempts to reduce the risk through the reserve fund happened well into the protocol running. Terra was managed largely by Do Kwon himself rather than any group to balance decision making and avoid mistakes. There was no insurance available for investors to protect against protocol failure.

Never take for granted the limited knowledge of users of your service and their tendency to skip past provided information. It is recommended to design a simple tutorial and quiz for new users which explains the basics of seed phrases, strong password generation, secure two-factor authentication, common fraud schemes, how ponzi schemes work, as well as other risks which are unique to the cryptocurrency space. This tutorial and quiz should ensure their understanding and be a standard part of the sign-up or download process which is difficult or impossible to skip.

For the full list of how to protect your funds as a financial service, check our Prevention Policies for Platforms guide.

Regulatory Prevention Policies

No specific regulatory policies have yet been identified in this case.

Create a standard tutorial and quiz for all new cryptocurrency participants, which is required to be completed once per participant. This tutorial and quiz should cover the basics of proper seed phrase protection, strong password generation, secure two-factor authentication, common fraud schemes, how to detect and guard against phishing attacks, how ponzi schemes work, as well as other risks which are unique to the cryptocurrency space.

For the full list of regulatory policies that can prevent loss, check our Prevention Policies for Regulators guide.