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My main thesis in the most recent Cryptonized episode, titled “The Latest on Luna's ($LUNA) Downfall,” is that this is not the end for algorithmic stablecoins. Developers will learn from the UST catastrophe, the idea will evolve even further, and a new generation will be born. I stand by that thesis. However, Luna’s collapse has been constantly on my mind. In the following text, I’ll summarize the main events that lead to it, in hopes that it’ll help us understand what went wrong.

I’ll also examine the ideas of a coordinated attack that my guest Barnaby Andersun presented. We’re not privy to information that’s not public already, so we can’t confirm or deny anything. I can, however, take a look at the theory of a George-Soros-To-The-Bank-Of-England style of attack and what that would look like. Maybe that’ll help us understand this situation better. 

Finally, we’ll look at Terra co-founder Do Kwon’s proposal to save the protocol by creating a new chain in which UST doesn’t exist. Will the retail investor that lost everything trust the Terra brand again? Do Kwon seems optimistic. In the mentioned proposal, Kwon states: “$UST peg failure is Terra’s DAO hack moment - a chance to rise up anew from the ashes.”

The Terra ecosystem’s implosion

The algorithmic stablecoin rested on the relationship between two tokens, UST and LUNA. At the height of the LUNA-mania, a single LUNA was worth an all-time high of $116. The UST stablecoin, also known as TerraUSD, had an $18 billion market capitalization. In May 2022, after a series of unfortunate events, both went to practically zero. A total value of approximately $40 billion vanished in the process.

The other part of the story is that UST was going through yet another process. It was transitioning from being an unbacked algorithmic stablecoin that counted on market forces to keep itself balanced, to a semi-backed asset. The company behind the project, Terraform Labs, created the Luna Foundation Guard nonprofit organization. Its mission was to aggressively buy bitcoin, build reserves, and have them ready to defend the UST peg to the dollar. 

Sadly, that plan didn’t work. 

Reportedly, Terraform Labs sold it all and still couldn’t maintain the UST peg. 

The Anchor Protocol’s role in the story

At one point, locked up in the Anchor protocol, were 14 billion of the 17.84 billion UST in existence. The mythical 20% APY brought people in droves, and those people could only enter the party if they used UST. That and positive reviews in most crypto sites and channels made UST the fourth most used stablecoin on the planet. That’s a several billion-dollar business. 

We don’t know for sure what caused UST to depeg from the dollar on that grim May day. We do know that the depeg caused massive withdrawals from the Anchor protocol. Reportedly, the UST in Anchor fell from $14 billion to around $11 billion. Then, the death spiral brought even more people to take out their money. This second wave wasn’t as lucky, and some weren’t able to withdraw. 

Many people in crypto believed that the Anchor protocol’s yield was too high and thus wasn’t sustainable. Also, the whole Terra ecosystem was built on its back, which created a giant single point of failure. Apparently, those people were right. Terra’s dependence on the Anchor protocol and the extreme amount of UST it contained were both tested. And Anchor failed the test.

A brief timeline of the Terra network

It all happened in a flash. A few of the main moments in Terra/ Luna’s history.

• In early 2018, Co-founders Do Kwon and Daniel Shin released the Terra network.
• As soon as April of the same year, they got their first public criticism. The head of risk at MakerDAO, Cyrus Younessi flat out said that the UST/ LUNA protocol was doomed to fail. His hypothetical scenario foreshadowed events to come.
• By July, Terra introduced the Anchor protocol. The 20% APY they offered was a Terra staple and drove the ecosystem’s growth. 
• In 2021, interest in Terra suddenly exploded. By the end of the year the market cap of UST was $18 billion and the one for LUNA was $32 billion.
• In January 2022, Do Kwon and company launched the Luna Foundation Guard. A non-profit organization tasked with building a bitcoin reserve to support the UST peg to the dollar.
• In May 2022, UST depegged, and the whole ecosystem lost its equilibrium. It could never regain it, and both UST and LUNA went practically to zero.
• On May 12th, Terraform Labs officially stopped the Terra blockchain. The price of LUNA was so low that the security of the network had become a concern. The risk was so great that they just stopped the experiment.

Is there evidence of a coordinated attack against the Terra ecosystem?

The theory that my guest in the latest episode of Cryptonized, Barnaby Andersun presented, reached the mainstream. So much so that even Charles Hoskinson, the creator of Cardano, posted about it. The story was that BlackRock and Citadel borrowed 100K BTC from Gemini, contacted Do Kwon and swapped 25K of those for UST, and then dumped it all on the market. 

The waves it caused proved to be too much for Terra’s algorithmic stablecoin and its Anchor protocol. The bank run that followed left the protocol in shambles. This unsympathetic-but-clever attack is similar to what George Soros did in the nineties against the British pound. In this other analysis of the supposed attack, a pseudonymous Twitter user estimated that the aggressors took home $800 million. 

However, both BlackRock and Citadel denied any involvement. And Gemini denied loaning the BTC. After that happened, Charles Hoskinson deleted his tweet. And, since we have no reason to believe the institutions are lying, Andersun and I will retract our statements as well. 

Let’s be clear, though, the finance world is a jungle. If there’s a weakness, the market is highly incentivized to detect it and test it. It’s the nature of the game mixed with human nature.

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