$LUNA went into a death spiral as liquidity exits the Terra ecosystem.
Coordinated Attack
On May 8, the crypto space saw one of the darkest days fall on $LUNA and $UST as the entire Terra ecosystem crumbled. $UST, The largest decentralized stablecoin by market capitalization, lost its peg after its arbitrage system failed, causing widespread panic.
$LUNA lost more than 99% of its value in an unprecedented attack that sparked a response from Treasury Secretary Janet Yellen during a Senate Banking Committee hearing on Tuesday. Making a case for her call to regulate stablecoins, she said:
“A stablecoin known as Terra USD experienced a run and declined in value.… I think that simply illustrates that this is a rapidly growing product and that there are risks to financial stability, and we need a framework that’s appropriate.”
Luna Foundation Guard (LFG) deployed its Bitcoin ($BTC) reserves to maintain the $UST peg but failed. LFG is a foundation that establishes a decentralized $UST reserve protocol. The reserve serves as a second layer of protection to keep the peg if the arbitrage system fails. $UST is currently trading at $0.70.
Anticipation builds up as recovery efforts are expected to be announced after a tweet by Do Kwon, co-founder of Terraform Labs, on May 10. However, as $LUNA continued to slide, any hope of recovery was dimmed further.
On May 11, Do Kwon gave his assurance to the Terra community that efforts would be taken to restore the battered protocol:
Significant Risk to the Ecosystem
The devaluation of $LUNA as a risk asset and $UST’s failure to maintain its peg destabilizes the entire crypto ecosystem. It has wide ramifications when two major crypto assets with billions in wealth are wiped out in hours.
Centralized stablecoins do not have the same transparency and accountability to their community, unlike decentralized stablecoins. In addition, there is a false assurance that centralized stablecoins are backed by the US dollar. This is not true, as the settlement agreement against Tether Holdings Limited discloses.
The attack on the Terra ecosystem and the stress placed on its protocols have nothing to do with its co-founder, Do Kwon. Instead, it was an opportunity to make more money through exploitation and manipulation. It also builds a case for Washington to reign on a stablecoin framework.
Attacks on Do Kwon
Tribalism is certainly a part of the crypto space, albeit an ugly one. Many have attacked Do Kwon for his crass remarks in the past. Some influencers who have raised red flags on potential flaws that could be exploited were immediately rebuked.
The outspoken billionaire was also recently linked to a failed stablecoin project called Basis Cash ($BAC), as reported in an article published on May 11, written by Sam Kesslerand Danny Nelson from CoinDesk. The abandoned project sank below the 1 USD peg in early 2021 and is now trading at less than $0.01.
Is There Hope?
The prospect of recovery looks bleak, but there is a possibility that $LUNA and $UST may recover. Like many of the protocols that suffered devastating exploitations, the strength of the community becomes the driving factor.
The Terra ecosystem is huge, with many projects developing on its blockchain. Therefore, it may be too big to fail. However, concerted efforts by its backers may soon put Terra back on the recovery path.
