When the Luna crypto network collapsed, it is estimated that $60 billion was wiped from the digital currency space.
Algorithmic stablecoins (UST) are unlike Tether or USD coins, which are backed by physical dollars or assets stored in banks.
An arrest warrant has been issued for Do Kwon, co-founder of Terraform Labs, which housed sister tokens Luna and TerraUSD.
The Terra Network and its leader, Do Kwon, rose to prominence in the cryptocurrency world over a four-year span, all ending in a catastrophic fall from grace. The Luna crypto network collapsed in what is considered the biggest crypto crash ever, wiping out an estimated $60 billion, shaking the global digital currency market.
There are two stories related to Luna Crypto: the Terra USD/UST stablecoin and the actual Luna coin. Once Luna and UST crashed, there was a total liquidity crisis in the cryptocurrency space that led to even more catastrophic losses in value. The crypto community has yet to recover this.
To understand what happened, let's review what happened here step by step.
What exactly is Luna Crypto?
You may have heard of TerraUSD and Luna, here's a quick breakdown of exactly what they are. A lot of moving parts within the Luna network before its collapse.
Terra USD (also known as UST) and Luna are two sister currencies on the same network.
Terra is a blockchain network, similar to Ethereum or Bitcoin, that generates the Luna Token. The network was created in 2018 by Dr Kwon and Daniel Shin of Terraform Labs.
As we know, Terraform Labs has developed UST coin as an algorithmic stablecoin on the Terra Network. While other stablecoins (USDC or Tether) are fiat-backed, UST will not be backed by real assets. Instead, UST's value will be backed by its sister token, Luna. More on that later.
Stablecoins are considered safe havens in the crypto space as they have a stable value of around 1 USD. It aims to be a stable store of value for investors, unlike other volatile currencies (such as Ethereum).
Luna is Terra's blockchain native token, similar to how Ether is used in the Ethereum network. However, Luna had four different roles in the Terra Network:
- Primarily a method of paying transaction fees on the Terra Network.
- Terra's stablecoin is a mechanism for maintaining pegs.
- Staking on Proof of Stake (DPoS) representing Terra to validate network transactions.
- Participate in the governance of the platform by adding and voting on proposals for changes to the Terra Network.
How much was Luna worth?
A Luna coin was priced at around $116 in April and fell to a fraction of a penny before it was listed. Before that, many crypto millionaires were made within a year from the coin's price to less than $1 in early 2021. This has largely led to Kwon's cult hero status among (some) retail crypto investors. There were many success stories published in the media about how regular people got rich from Luna.
Luna Token has skyrocketed nearly 135% in less than two months until reaching its peak in April 2022. The biggest incentive is that you can share your UST holdings on the Anchor Trading platform for a 20% annual yield. Many analysts felt that this exorbitant rate was unsustainable.
Remember that the Anchor Protocol is a decentralized money market built on the Terra Blockchain. This platform has become popular for its aforementioned 20% profit for UST holders who deposit their tokens on the platform. Then it ie then the anchor will turn around and lend the deposit to another investor. Many skeptics were concerned about where the money to pay these rates came from. Some consider it an obvious Ponzi scheme. At one point, 72% of UST was accumulated in Anchor as the platform was the primary driver of Terra's demand. Luna Crypto network collapsed.
What happened to UST?
Before we look at this crypto disaster, we need to briefly discuss stablecoins. A stable coin is linked to a more stable currency like the US dollar. Both Tether and USDC are pegged to the USD.
Stablecoins are also used to hedge against volatility in the crypto space. For example, let's say that the price of Ether is $1,000 You can exchange one Ether for 1,000 USDC tokens. When investors expect a hit in the crypto market, they put their money into stablecoins to protect their assets.
The UST currency was not backed by an actual US dollar but an algorithmic stablecoin. The belief was that Terraform Labs could use clever mechanisms with billions of bitcoin reserves to maintain UST's peg without a US dollar backstop.
You need to burn Luna to create UST. So, for example, when Luna Token was worth $85, you could trade one token for 85 UST. This deflationary protocol was designed to ensure Lunar's long-term growth.
To keep the UST peg, one UST can be exchanged for $1 worth of Luna at any time. If the UST slips, traders can make money by buying UST and then exchanging it for Luna.
Both Luna and UST crashed when UST lost its peg to the dollar, which qualified it as a stablecoin.
TerraUSD was vulnerable because it was not backed by cash, treasuries or other traditional assets like the popular stablecoin Tether. UST's stability derives from the algorithm that linked the value to Luna. Notably, many experts were skeptical that an algorithm could keep two tokens stable.
Why did Luna crash?
Luna Crypto crashed mainly because of its connection to Terra Network's algorithmic stablecoin Terra USD (UST).
On May 7, more than $2 billion worth of UST was staked (taken out of the anchor protocol), and millions of it was quickly liquidated. Whether this happened in response to rising interest rates or whether it was a malicious attack on the Terra blockchain is debated. The massive sell-off brought the price of UST down from $1 to $0.91. As a result, traders began to exchange 90 cents worth of UST for $1 Luna.
Once a large amount of UST is offloaded, the stablecoin begins to decline. In the panic, more people sell USTs, which in turn creates more Luna and increases the circulating supply of Luna.
After this crash, crypto exchanges started listing Luna and UST pairs Long story short, Luna was abandoned because it became worthless.
What happened to Luna after the accident?
The Luna meltdown affected the entire cryptocurrency market, which was already extremely volatile, and the entire market system was experiencing difficulties at the time. It is estimated that the Luna crash tanked the value of Bitcoin and caused an estimated loss of $300 billion across the entire cryptocurrency space.
Crypto leaders Voyager and Celsius file for bankruptcy. That is why Three Arrows Capital (3AC) was forced into liquidation.
Many people lost their life savings and got into financial trouble due to the Luna Crypto crash. If you do a quick search online, you will find many of these horror stories. Many loyal Luna fans (who refer to themselves as "lunatics") took to Reddit threads to share their disastrous stories. One retail crypto investor even admitted that they lost $20,000 of their savings on Luna.
The only winners are those who exited their positions before the crash. So one winner we have to highlight is hedge fund Pantera Capital. They saw a 100x return on their initial investment of $1.7 million. The company exited its Luna position before the fall for a $171 million refund.
What happened to the founders of Luna Crypto?
Do Kwon shared a recovery plan for Luna, and things looked promising for some time in May after the original crash. But the coin eventually falls. It was immediately abandoned. However, Terra has launched a new coin, Luna 2.0.
A South Korean court issued an arrest warrant for Do Kwon, on September 15, it was announced. This came about four months after the collapse of Luna and UST, two tokens issued by Terraform Labs. Do Kwon and five others are currently charged with violating local market laws.
South Korean officials want to revoke Kwon's passport because they believe he is currently living in Singapore. In theory, if this legal action goes through, Kwon would have to return to South Korea within 14 days of receiving the withdrawal notice. And the relevant ministry is currently evaluating the request.
Some investors who lost money in Luna filed a complaint with local prosecutors, claiming that Kwon was involved in fraud and illegal fundraising. It is generally estimated that around 280,000 people in South Korea have invested money in Luna Crypto.
How to invest?
If you are looking to invest in the cryptocurrency space, you may want to consider an investment kit such as Crypto Kit or Emerging Tech Kit. Both kits help spread risk across the entire ecosystem rather than investing in just one currency or company. They both use AI to assign portfolio weights each week to four top picks: crypto, tech ETFs, large tech companies, and small tech companies. Users can activate portfolio protection at any time to protect your profits and minimize your losses, regardless of the industry you invest in.
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Bottom line
If you want to invest in digital currencies and other particularly volatile assets, you have to accept that there will be some outside risk associated with it. Hopefully, this catastrophic Luna Crypto collapse is more of a curse, a black swan event than the beginning of an era. Remember, the key takeaway should be that if an investment seems too good to be true, it usually is. Second, for investors who are still bullish on crypto over the longhaul, it would be wise to limit these investments to 5-10% of one's portfolio.
Hope What is Luna Crypto? What really happened to it? understood.
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