What really happened to Terra LUNA and UST?

Terra LUNA has now lost almost $100 of its market value, whereas UST, after hitting a low of $0.29, seems to be approaching the peg threshold again. The path, however, is still a long way off and the whole market is totally shaken by this.

There is still commotion and a lot of doubts and perplexity among investors. There are many questions circulating and very few clear answers available. Is it possible that the structure of a fallacious system collapsed from one moment to the next without arousing any suspicion? Who started all this? Will the project that seemed so ambitious ever have a chance to catch up? 

Who started the war against Terra LUNA and the UST stablecoin?

Yesterday’s day will hardly be forgotten by the entire crypto community. Those most affected were certainly Terra’s supporters, who in a matter of hours saw their savings burn before their eyes. 

The massive selling that took place on LUNA, the initial de-peg of UST, and the theatrics enacted by Anchor are among the factors that triggered this heavy collapse. 

But is there a real culprit that started this immense domino effect? 

The news comes from the Bitcoin Archive Twitter account, which indirectly seems to point the finger at BlackRock and Citadel, two of the world’s largest investment firms. 

?BREAKING: BlackRock And Citadel deny attacking TerraUSD (UST) – Forbes

? So, who…?

— Bitcoin Archive ??? (@BTC_Archive) May 11, 2022

“?BREAKING: BlackRock And Citadel deny attacking TerraUSD (UST) – Forbes

? So, who…?”

According to some rumors, the intentions of the attack were purely malicious, putting real market manipulation into play. 

The strategy of BlackRock and Citadel

From what seems to transpire, BlackRock and Citadel would first borrow 100,000 BTC from the Gemini platform and then trade 25,000 BTC in UST. When the time was right, they contacted Do Kwon, the co-founder of Terra, telling him that they were willing to sell a large amount of BTC in exchange for UST at a discounted price. 

By agreeing, Do Kwon drastically reduced the amount of UST liquidity in the market. At that point, BlackRock and Citadel began dumping all the remaining UST and BTC, triggering a cascade of sales on both assets. 

And here comes the malfeasance. Both investment firms knew that Anchor was nothing more than a big Ponzi scheme, fueled by promises of high APYs at 20%. As a result, this sudden market crash would have triggered more withdrawals than the protocol could repay. In fact, according to Forbes, more than $5 billion UST would have been withdrawn from the platform, about a third of the entire market capitalization of the algorithmic stablecoin. 

A kind of bank run that occurred during the Great Recession of 2008, which led to the failure of Lehman Brothers, one of the world’s largest investment banks at the time.

The excessive amount of withdrawals and selling then triggered aggressive selling on LUNA, resulting in a series of chain events that self-fueled UST’s de-peg process and complete market breakdown. 

And that is how the “game” resulted in one of the greatest catastrophes in crypto and DeFi history, the failure of the entire Terra ecosystem. 

All BlackRock and Citadel had to do was go to the market and reappear with the amount of the loan to be repaid at a more than discounted price, thus cashing in a nice margin to put in their pockets. 

The Gemini exchange responds

If what has just been described really happened, the Gemini exchange would also turn out to be involved in this market manipulation. Without pondering too much, it immediately responded with a tweet, defending itself against the incident as follows:

We are aware of a recent story that suggested Gemini made a 100K BTC loan to large institutional counter-parties that reportedly resulted in a selloff in $LUNA. Gemini made no such loan.

— Gemini (@Gemini) May 11, 2022

Without mentioning names, they claim that they did not participate in any way in this type of lending, which was reportedly the cause of LUNA’s collapse, backed by one of the largest short sales in the crypto market.

Do Kwon’s recovery plan arrives.

After yesterday’s announcement, here comes the recovery plan from Do Kwon. It does not appear to be anything official at all, and for now it is only a thread divided into 14 points posted on Twitter.

1/ Dear Terra Community:

— Do Kwon ? (@stablekwon) May 11, 2022

The most important part that seems to be emerging is that currently the primary goal would be to absorb the circulating supply of UST from the market as quickly as possible. This should make the process of approaching the stablecoin peg level easier. 

Do Kwon remains very optimistic. In his last point he states the following:

“Terra’s return to form will be a sight to behold.

We’re here to stay. And we’re gonna keep making noise”.