Terra's Do Kwon is on trial, and it was reported yesterday that he plans to plead guilty.
I started selling BTC to buy NFTs and speculate on altcoins when Luna had just collapsed.
Half a year later, FTX also collapsed.
At that time, I had just downloaded the FTX Pro app, transferred money in, and opened a contract (I remember I bought AR), and 200 UST got liquidated, and my explosive head got caught, after a while, FTX Pro couldn't open anymore.
I still have the FTX Pro app on my phone and haven't deleted it.
✅ Korean Do Kwon founded Terraform Labs in Singapore in 2018, issuing an algorithmic stablecoin called TerraUSD (which is UST), and also issuing the cryptocurrency Luna.
UST (stablecoin) and Luna (governance token) operate in a dual-token system:
When the stablecoin UST's price is above 1 dollar, for example, reaching 1.05 dollars, arbitrageurs will spend 1 dollar of Luna to exchange for 1 UST from the Terra system, then sell UST on the market for 1.05 dollars, thus making a profit of 0.05 dollars.
Result: Luna was destroyed, UST was issued → UST supply increased → UST price fell back to 1 dollar.
Through operations initiated by arbitrageurs, the smart contracts in the Terra system automatically destroyed Luna and issued UST, maintaining the UST price stable at 1 dollar;
Similarly, when USDT is below 1 dollar, for example, 0.95 dollars, arbitrageurs will spend 0.95 dollars to purchase 1 UST, then use this 1 UST to exchange for 1 dollar of Luna from the Terra system, and sell Luna for 1 dollar, making a profit of 0.05 dollars.
In this process, the Terra system destroyed UST and issued Luna. UST supply decreased → UST price rose back to 1 dollar.
The Terra protocol itself only provided a redemption mechanism (on-chain swap), the price of UST depended on algorithms and was maintained by the operations of arbitrageurs.
Therefore, UST is referred to as an algorithmic stablecoin.
✅ However, in May 2022, the algorithmic stablecoin UST decoupled.
The reason for the decoupling is: at that time, the main application scenario for UST was the Anchor protocol (depositing UST could earn a 20% annual interest). In early May, a large amount of funds suddenly withdrew UST from Anchor, amounting to hundreds of billions of dollars within a few days, leading to an oversupply of UST in the market.
Due to the oversupply of UST, it dropped from 1 dollar to 0.98 dollars.
✅ Theoretically, at this time, arbitrageurs would buy UST at a cheap price of 0.98 dollars, destroy it in the Terra system, and exchange it for Luna.
At first, arbitrageurs kept operating, UST was destroyed while Luna was issued in large quantities, causing a certain drop in Luna's price due to the large issuance in a short time, which raised concerns among arbitrageurs that the Luna obtained by selling UST would continue to depreciate, reducing the incentive to arbitrage, thus failing to quickly restore the UST decoupling price.
At the same time, the issuance of Luna caused its price to drop → market confidence further eroded → more people sold UST.
The vicious cycle caused UST to completely lose its peg, and its price quickly plummeted from nearly 1 dollar to about 0.1 dollars, while Luna's price also collapsed, plummeting from about 119 dollars to almost zero.
Within a week, these two assets evaporated hundreds of billions of dollars in market value.
✅ Looking back, the trigger for Luna's collapse was the sudden withdrawal of a large amount of funds from the Anchor protocol in May 2022.
Anchor is the 'killer application' of the Terra ecosystem, allowing retail and institutional investors to earn nearly 20% fixed annual returns by depositing UST (referred to as 'low-risk stablecoin wealth management').
However, this 20% yield is not a natural market interest rate, but is maintained by continuous subsidies from Terraform Labs and Luna Foundation Guard (LFG).
In fact, Anchor's interest expenses were greater than its lending income, leading to long-term losses in reserves. By March to April 2022, Anchor's 'yield reserves' began to be rapidly consumed, and the market had already noticed that the subsidy was about to run out. Once the subsidy decreased and interest rates fell, investors had no reason to continue holding UST.
Therefore, the large withdrawal of funds from the Anchor protocol in May 2022 and the subsequent sale of UST had already been foreseen.
✅ I have always been curious, did those who heavily invested in Luna and the stablecoin UST not consider that both coins would plummet and that the stablecoin UST would quickly decouple? At that time, some economists actually raised doubts, but they did not attract attention.
If it were just a few thousand UST or a few hundred UST from retail investors, probably no one would do such detailed investigation and calculations.
Don't the big players who invested millions of UST do the math? Even buying insurance requires an actuary to calculate, but buying Luna and UST doesn't require any calculations?
Before May 2022, what proportion of UST holders noticed that the Anchor subsidy was about to run out and withdrew their UST funds from the Anchor protocol in advance? Were they lucky enough to cash out before UST dropped to 0.1?
🔴 Those who are preparing to trade, hold, or deposit USD1 to obtain $WLFI tokens in various exchanges recently, do you feel a bit familiar?
But there's no need to worry; USD1 is not an algorithmic stablecoin, but is backed by real assets like short-term U.S. Treasury bonds held by licensed custodians authorized by the U.S. government, maintaining high liquidity for 1:1 exchange with U.S. dollars. This is also a compliance requirement in the stablecoin bill recently passed by the U.S. Congress, which mandates that stablecoins must be backed 1:1 by high-liquid real assets such as short-term U.S. Treasury bonds held in licensed custodians in the U.S. Users holding the USD1 stablecoin can exchange it for dollars at any time, regardless of the amount.
The reason for the collapse of Do Kwon's UST is that it is an algorithmic stablecoin and does not have real assets to maintain liquidity for 1:1 exchange with dollars at any time.
Algorithmic stablecoins are unregulated air coins.
✅ The collapse of Luna in May 2022 indirectly led to the collapse of FTX in November 2022.
The reason is that the collapse of Luna triggered deleveraging in the entire crypto industry, with giants in asset management and lending platforms like 3AC (Three Arrows Capital), Celsius, and Voyager suffering huge losses and going bankrupt, either because they held massive UST/Luna or because they invested UST into the Anchor protocol, or because they lent money to 3AC, all due to the collapse of Luna.
Alameda, the brother company of FTX exchange, engaged in cryptocurrency quantitative trading and market-making, also had huge positions in the Luna ecosystem, and the collapse of UST/Luna caused significant losses for Alameda. To cover the losses, Alameda and FTX used customer funds to fill the gaps.
When the CoinDesk report in November 2022 revealed abnormalities in Alameda's balance sheet, the market quickly initiated a 'bank run' on FTX, leading to the rapid collapse of the FTX exchange.
🚩 In this historic event, giants in asset management and lending platforms like 3AC (Three Arrows Capital), Celsius, and Voyager are actually on the same level as us retail investors. Poor risk control and lack of judgment make no difference, regardless of the size of the institution; they are all just chives.