$84 million triggers the collapse of a $40 billion financial empire: The Rise and Fall of UST

Who would have thought that Luna, the second largest public chain ecosystem with a TVL of nearly $20 billion, would have experienced a horror disaster similar to the Thai baht and Lehman Brothers in just 2 days.

This article is authorized for reprint by BlockBeats, original source.

In 1997, legendary financial killer Soros and his crocodile allies hunted the Southeast Asian bubble market, massively selling the Thai baht and quickly depleting Thailand's central bank's $30 billion foreign exchange reserves, eventually forcing the Thai baht to adopt a floating exchange rate system, further plunging Southeast Asian countries into a financial crisis abyss.

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In 2008, Wall Street investment banking giant Lehman Brothers faced a massive subprime mortgage exposure, with net debt far exceeding the company's market value several times, forcing it to file for bankruptcy in the Southern District of New York Federal Court, nearly destroying the entire modern financial system.

These epic capital showdown stories have spread throughout the world's streets and alleys over the past decade, becoming iconic events in history, studied repeatedly as textbooks. However, who would have thought that the same story would unfold again in the cryptocurrency market with only a 10-year history, and be "live broadcast" to everyone through on-chain traces.

On May 10th, due to capital hunting and debt crisis, Terra ecosystem's native algorithmic stablecoin UST experienced a severe anchor deviation event, dropping to as low as $0.6. This second largest public chain ecosystem with a TVL of nearly $20 billion relived the horror disasters of the Thai baht and Lehman Brothers in just 2 days.

Margin Call: The Life and Death Race of UST Collapse

Terra, as the second-largest public chain ecosystem in the cryptocurrency market, has always been a controversial subject. On one hand, through the Luna-UST dual coin mechanism, the Terra ecosystem successfully promoted its algorithmic stablecoin UST to the entire cryptocurrency market, rapidly increasing the price and market value of Luna; on the other hand, its "propaganda machine" Anchor Protocol, used to promote UST, has been widely criticized and widely regarded as an unsustainable "Ponzi scheme."

For a long time, both supporters and critics of Luna have been extremely extreme. Supporters call themselves the "Lunatics" army, attacking and sweeping criticisms of Luna's mechanism on social media platforms like Twitter every day; while critics, citing "Ponzi" as a reason, eagerly await the day when Luna collapses. Such a highly "tense" ecosystem is hard to ignore by speculators, and these capital killers always pay attention to industry trends, waiting for the best moment to strike.

After the Federal Reserve announced another 50 basis point rate hike, the opportunity finally arrived. Since May, the Nasdaq index has been continuously declining, the market's reaction to the macro situation is extremely pessimistic, and the price of Bitcoin has also dropped nearly 10% for several consecutive days. Panic quickly spread throughout the entire cryptocurrency market. The core team of the Terra ecosystem, LFG Luna Foundation Guard, announced that on May 8th, they would adjust the UST-3Crv liquidity pool on the main UST chain trading venue to prepare for the establishment of their powerful 4Crv pool.

All the conditions created a perfect storm for capital hunting, so on the evening of May 8th, the big players in the cryptocurrency circle quietly launched their long-planned "encirclement plan."

Phase One: Launching an Attack by Using the UST-3Crv Pool Withdrawal Gap

Early on May 8th, LFG withdrew $150 million of UST liquidity from the UST-3Crv pool in preparation for building the 4Crv pool, when the TVL of the UST-3Crv pool was around $700 million, and it only took about $300 million to deplete the UST liquidity.

Approximately 10 minutes later, a new address suddenly dumped $84 million worth of UST, severely affecting the balance of the 3crv pool.

To maintain the balance of the UST-3Crv pool liquidity, LFG withdrew another $100 million of UST from the pool.

At this point, rumors began to circulate on Twitter, claiming that the sell-off was orchestrated by LFG, and Terra founder Do Kwon immediately responded on Twitter.

Shortly after, multiple whale accounts began selling UST on Binance, with each transaction amounting to millions of dollars.

Impacted by the sell-off, UST began to unpeg. At this point, an address suspected to be Jump Trading UST market maker sold a large amount of ETH to buy UST in an attempt to stabilize UST's peg.

As of now, to maintain the UST peg, the address has sold over 50,000 ETH, leaving less than 13 ETH in the address.

By this time, the attack was mainly carried out through the UST-3Crv pool, involving an amount of around $300 million. If LFG's $4 billion 4Crv pool had been established before the attack, the above attack would not have been effective.

Phase Two: Anchor Funds Flee in Panic

Due to the small-scale unpegging event in the early hours of the 8th, panic spread rapidly between UST and Luna holders. Starting from May 8th, a large amount of UST locked in Anchor flowed into the market, further causing selling pressure on UST.

During this period, LFG announced the "lending" of their $700 million worth of Bitcoin savings to support the stability of UST.

However, according to Do Kwon, UST is not considered unpegged above $0.95, so Bitcoin will not be used above this threshold.

This also explains why UST has not returned to the $1 anchor after unpegging on the 8th.

However, LFG did not anticipate that the long-term failure of UST to return to the anchor would bring significant negative sentiment to the market. UST fleeing from Anchor began massive sell-offs, causing the UST peg to drop below the $0.95 threshold. LFG was forced to start liquidating Bitcoin savings, prompting Do Kwon to tweet again: "Mobilizing more funds."

Subsequently, an address starting with "0x599" began absorbing a large amount of circulating UST in the market, totaling over $200 million.

This quickly rebalanced the UST-3Crv pool, but the liquidation of Bitcoin further drove its price down, market sentiment continued to deteriorate, leading to massive liquidation of Luna, increased selling pressure on UST, and the UST-3Crv pool quickly fell into imbalance again.

In the early morning of May 10th, Jump Trading and LFG may have realized that something was amiss and no longer sold Bitcoin savings to protect the peg, allowing the situation to worsen as UST plummeted to $0.6. Although the anchor price later rebounded, the proportion of the Curve platform's UST-3Crv pool remained severely skewed, reaching 91.37%/8.63% at one point.

Phase Three: Behind-the-Scenes Trading, Rumors of Institutional Rescue Begin to Spread

After the "thrilling 2 hours" of UST triggering a death spiral, rumors began to circulate that institutions such as Jump and Alameda had reached certain behind-the-scenes deals and were preparing to inject $20 billion to start a rescue operation. Subsequently, an address starting with "0x6c" did receive a $20 billion transfer, but there was no significant action, and the address has not shown any connection to the UST incident.

In addition, Binance also appeared to be involved in the defense of UST. According to Hasu, the host of "Uncommon Core," Binance forcibly set a trading floor price for UST in its order book, preventing users from placing orders below the $0.7 threshold for an extended period.

This morning, news about LFG's financing surfaced again. According to sources, LFG is seeking help from institutions, hoping to raise $1 billion to support UST. Researcher Larry of The Block stated that the current financing details are: Jump Trading, Celsius, and Jane Street have agreed to the financing, promising around $700 million, while Alameda Research has not yet agreed. The institutions' condition is to obtain Luna spot at a 50% discount, lock it up for a year, and unlock it linearly on a monthly basis after a year. However, Larry emphasized that the financing has not been confirmed, and everything is subject to change.

Regulatory Shadow: Praying Mantis Captures Cicada, Yellow Bird Behind

Although the current discussions about UST unpegging are speculative, we have found extremely reliable information in the market. In the early morning of May 10th, renowned macro investor and Real Vision founder Raoul Pal interviewed Terra founder Do Kwon about the UST unpegging, although the interview content has not been aired, Raoul revealed some details of the event in a subsequent Bankless interview.

"It's simple, UST unpegged, Jump Trading, as the UST market maker, was forced to sell their ETH to buy UST, and then LFG was forced to liquidate their Bitcoin holdings," Raoul briefly explained the event when UST unpegged and immediately added, "This is a typical Margin Call, like someone tapping Luna on the shoulder and saying 'Give me back my collateral,' similar things happen every day in traditional finance."

Indeed, the amount triggered by the UST death spiral did not exceed $300 million, causing only a scale of several billion, which is indeed a small amount compared to traditional finance. However, what is most incredible is that it happened in plain sight, which is extremely rare in the traditional financial world. Thanks to blockchain, we have witnessed the first large-scale "Thai baht + Lehman" event in the history of cryptocurrency development.

This severe unpegging of UST is not Luna's first time triggering a death spiral. In May last year, UST also experienced a severe unpegging, with the price dropping to $0.85, and Luna and UST were only able to survive and develop under the rescue of LFG. Since then, to prevent a similar event from happening again, LFG has made a series of changes, including a new endorsement mechanism for UST.

In fact, buying Bitcoin and other L1 native tokens as an endorsement is not a wrong choice, but it will take some time to fully deliver this new mechanism. If LFG's $4 billion 4Crv pool had been established, such a collapse event might not have occurred. Unfortunately, the market did not give Luna's madman Do Kwon enough chance for redemption, and Luna's collapse this time lost to time.

Experienced DeFi players should know that the impact of this UST unpegging may not be limited to the Terra ecosystem. Like the bankruptcy of Lehman Brothers, the collapse of the Luna ecosystem may affect the entire cryptocurrency market. However, for many, including Raoul, the worst impact of this unpegging event is actually at the regulatory level. The "praying mantis catching cicadas" by the crypto giants may also attract the "regulatory sparrows" behind them.

We know that central banks around the world have been vigorously promoting their digital currencies (CBDC) in recent years. For the "stablecoin ace" UST to go off the rails in this way, it undoubtedly provides regulatory agencies with a perfect excuse. Setting aside the issue of whether UST can regain confidence, the earlier speculation about "UST unpegging may bring regulatory scrutiny" has already begun to spread widely on Twitter, causing concerns among many.

Sure enough, the regulatory winds arrived on the night of the incident. According to the news, on May 10th, at a meeting on Capitol Hill, U.S. Treasury Secretary Yellen discussed the regulation of US dollar stablecoins in the cryptocurrency market. Yellen believes that legislation on the regulation of US dollar stablecoins is imminent, "This area is growing rapidly and brings enormous risks. It is well known that today Terra UST experienced a round of decline."

Undoubtedly, the collapse of UST has once again cast a shadow over the entire stablecoin race, and now we must consider whether regulatory agencies around the world will launch a "regulatory siege" on stablecoins. Will the future cryptocurrency market lose its "sovereign freedom"?