TerraUSD and Luna: How to lose a trillion dollars in one week

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By Jevan Soyer. Crypto this month witnessed its biggest crash to date with TerraUSD and Luna. The trillion dollars mentioned in the headline is not an exaggeration to induce you to click on the link. At least one trillion dollars was lost in the crypto market at the time of this article. That is trillion, as in $1,000,000,000,000 or one million multiply by one million dollars.

The aim of this article is to show you what is happening in the crypto market these days. It should not be used as financial or investment advice.

TerraUSD, which is a stable coin, is pegged to the United States dollar. This in itself is kind of contradictory as cryptocurrencies like Bitcoin were supposed to be the antisepsis of fiat currencies. Stable coins are a token that has been pegged to the value of an alternative currency.

TerraUSD, also known as UST, was a stable coin pegged to the US dollar at a one-to-one ratio. One TerraUSD is intended to be worth one United States dollar at all times. Stable coins were supposed to be the safest of bets in the crypto world as they were pegged to an actual tangible currency, in some cases.

Stable coins as the name suggests were supposed to be stable and were to be used by investors to escape market volatility that cryptocurrencies are known for. You could have bought these stable coins without being forced to exit the crypto ecosystem entirely. If you bought into the idea of stable coins last year and invested your entire retirement savings into it, this is what it would look like.

TerraUSD	May 18th, 21	TerraUSD	April 4th, 22	TerraUSD	May 18th, 22
TT$69.85	TT$2,000,000.00	TT$779.10	TT$22,075,793.31	TT$0.01138016	TT$32.28
US$10.41	US$294,968.00	US$116.11	US$3,289,984.10	US$0.0001696	US$4.81

So, if you invested TT$2,000,000.00 on May 18^th, 2022, your investment would be worth TT$32.28 at the time of this article May 2022. The average investor in TerraUSD is working-class people, and cannot afford to lose their investment.

Who invested in TerraUSD?

The average investor was someone trying to avoid risk, after all TerraUSD was supposed to be stable, not subject to the wild ups and downs of the crypto market. To put the minds of investors at ease, TerraUSD’s founder, Kwon Do-hyung, commonly known as Do Kwon, stated that TerraUSD was backed by 80,000 Bitcoins (valued US$2,310,592,000.00) in reserve to be used to maintain the peg. With this being said, investors both big and small, bought into the idea of TerraUSD.

How does a stablecoin work?

There are two common categories of stablecoins, those that are backed by assets and those that are backed by algorithms. The most popular stablecoins, like Tether and USD Coin, maintain their levels with assets. The assets backing USD Coin consist only of cash and short-term US government securities.

Algorithmic stablecoins are not backed by assets, instead using financial engineering to maintain their links to the dollar. The algorithmic stablecoin TerraUSD maintained its $1 price by relying on traders to take on an arbitrage function between the values of Terra and Luna.

When Terra fell below the peg, traders would “burn” the stablecoin—removing it from circulation, by exchanging TerraUSD for $1 worth of new units of Luna. That action reduced the supply of TerraUSD and raised its price. When TerraUSD’s value rose above $1, traders could burn Luna and create new TerraUSD, thus increasing the supply of the stablecoin and lowering its price back toward $1.

So how did TerraUSD/Luna crash?

Even though no one really knows what happened, it did not come as a surprise to anyone. There are four different viral Twitter threads all claiming to know how Luna collapsed and each explanation is slightly different.

Firstly, the internet favourite among these threads, casts blame on Citadel the villain in the GameStop saga saying that they secretly got a 1,000,000 Bitcoin loan from Gemini (owned by the Winklevoss twins), and destroyed Luna with it. Of course, the Winklevoss twins denied these claims.

Secondly, TerraUSD was likened to a Ponzi scheme and algorithmic stable coins have always failed in the past.

Thirdly, it has to do with Do Kwon. He is the creator of Terraform Labs and TerraUSD, and Luna became more and more successful. Do Kwon slowly became more and more arrogant.

He would dismiss all his critics and even refer to them as poor. Obviously, this generated a lot of hate for TerraUSD. People were praying for its downfall, so they might have gone so far as to make it happen.

On November 25^th, 2021, Freddie Reynolds posted a theory of how you could crash Luna/TerraUSD with a Soros-style black Wednesday attack. He was referring to when George Soros broke the British pound and went into great detail even stating that you would only need a billion dollars to accomplish it. The process was described in detail and it was shown that you could profit 50 million dollars in the process. You would just rinse and repeat until Luna falls apart.

A few weeks ago I responded to @tbr90’s tweet with a brief outline of how a wealthy attacker could not only break @terra_money but profit heavily doing it with a Soros style Black Wednesday attack. Below I provide a detailed breadown…~$1B capital needed.https://t.co/MIbSH3Lwpq

— FreddieRaynolds (@FreddieRaynolds) November 25, 2021

The expectation at this point one would think is that Terra Labs would investigate if this is possible, and then do everything within its power to stop it from happening. Instead, Do Kwon says this,

“Probably the most retarded thread ive read this decade.

Silence is a perfectly acceptable option if stupid.

Billionaires in my following, go ahead, see what happens”

Probably the most retarded thread ive read this decade.

Silence is a perfectly acceptable option if stupid.

Billionaires in my following, go ahead, see what happens https://t.co/wtt9OhX4kg

— Do Kwon 🌕 (@stablekwon) November 28, 2021

There is no denying that Do Kwon is an intelligent man, so why would you not only taunt your followers, but your followers with the resources to do you harm. It is like saying the Titanic is unsinkable and then willfully ramming an iceberg.

The internet is like the Wild West, most internet users understand that there are unwritten laws and abide by them. Taunting the internet, collectively one would assume, would be breaking one of these unwritten laws.

These taunts continued all the way up until the end, adding fuel to the theory that Do Kwon’s attitude and taunts led to an attack on TerraUSD/Luna.

🌕 pic.twitter.com/cLnCVTwn3K

— Algod🫐 (@AlgodTrading) May 10, 2022

al god trading who said if Luna breaks new all-time highs I will short it with size and Do Kwon responds yeah but your size is not size this guy responds statistically you’re dunking on 99 of your community but all right someday your Ponzi will collapse you can’t keep fueling anchor

Yeah but your size is not size

— Do Kwon 🌕 (@stablekwon) March 9, 2022

This goes on and on, until the eventual crash. The trolling went on as Do Kwon offered a multi-million-dollar wager. The issues highlighted weeks prior were not addressed, and here we are now, TerraUSD/Luna losing 99.9% of its value and pulling down the entire cryptocurrency market with it.

Essentially, Luna/TerraUSD was being ran like a Ponzi scheme, but being a jerk along with benefitting from the proceeds of a potential Ponzi scheme, definitely doesn’t help. It was also revealed by Coindesk that Do Kwon was secretly behind another failed stable coin called Basis Cash. He participated anonymously under the pseudonym Rick and his partner was called Morty.

Regular investors who don’t have millions to spare had their savings wiped overnight. Some investors lost houses and others lost life savings. If one lesson should be learned from this is beware of algorithmic stablecoins, they will eventually turn out to be a pump and dump.

About Bitcoin

The world’s first cryptocurrency, Bitcoin is stored and exchanged securely on the internet through a digital ledger known as a blockchain. Bitcoins are divisible into smaller units known as satoshis — each satoshi is worth 0.00000001 Bitcoin.

How does Bitcoin work?

Whitepaper

Official website

Bitcoin was created by Satoshi Nakamoto, a pseudonymous person or team who outlined the technology in a 2008 white paper. It’s a simple concept: Bitcoin is digital money that allows for secure peer-to-peer transactions on the internet.

The invention of Bitcoin was a breakthrough in cryptography. Bitcoin’s key innovation was the blockchain—a piece of software that acts like a ledger, logging every transaction ever made using Bitcoin. Unlike a bank’s ledger, the Bitcoin blockchain is distributed and verified across a network of computers. No company, country, or third party is in control of it. And anyone can become part of that network.

Bitcoin is based on encryption, making it extremely secure and universally accessible. Creating a “bank account” on the global Bitcoin network generates an extremely long password aka a “private key” that is impossible for anyone else to guess. Anyone, anywhere with internet access can receive, send, and hold Bitcoin using the public version of their key (i.e. the version of their private key that can be freely shared in order to securely receive funds).

There will only ever be 21 million BTC. Bitcoin is digital money that cannot be inflated or manipulated by any individual, company, government, or central bank.

Bitcoin is highly divisible. You can hold, send, or receive fractions of a BTC. The smallest unit, i.e. 0.000 000 01 BTC, is called a “satoshi” or “sat”. As Bitcoin’s value has risen, its easy divisibility has become a key attribute.

What is Bitcoin mining?

Bitcoin is often considered to be a “store of value” like gold, and like gold, new Bitcoins are created by “mining” (up to a maximum 21 million coins).

Bitcoin mining is the process by which thousands of computers around the world compete to record and verify transactions on the network. These specialized computers known as ‘mining rigs’ perform the equations required to verify and record a new transaction.

 In the early days, a typical desktop PC was powerful enough to participate, which allowed pretty much anyone who was curious to try their hand at mining. These days, however, the computers required are massive, specialized, and often owned by businesses or large numbers of individuals pooling their resources. As of October 2021, Cambridge University researchers estimate that U.S.-based miners maintain the highest percentage of global mining by country.

Who created Bitcoin?

The principles behind Bitcoin first appeared in a white paper published online in late 2008 by a person or group going by the name Satoshi Nakamoto. 

This paper wasn’t the first idea for digital money drawing on the fields of cryptography and computer science—in fact, the paper referred to earlier concepts—but it was a uniquely elegant solution to the problem of establishing trust between different online entities, where people may be hidden (like Bitcoin’s own creator) by pseudonyms, or physically located on the other side of the planet.

Nakamoto devised a pair of intertwined concepts: the Bitcoin private key and the blockchain ledger. When you hold Bitcoin, you control it through a private key—a string of randomized numbers and letters that unlocks a virtual vault containing your purchase. Each private key is tracked on the virtual ledger called the blockchain.

Satoshi’s identity has never been revealed, and likely never will be. The fact that Bitcoin is not controlled by a single person or organization is core to its value proposition.

How does Bitcoin have value? 

Bitcoin’s value is inspired by properties such as:

A fixed and predictable monetary supply. Unlike fiat currency (government-backed money), new Bitcoin cannot be created suddenly or by the trillions by any elected or unelected official. There will only ever be 21 million Bitcoin.

Bitcoin operates by open-source code and is globally transparent, unlike fiat currency. At any time, anyone can independently verify the total Bitcoin supply and its underlying code, as well as the balances of each account on the global ledger.

Bitcoin is secured by cutting-edge encryption, and is backed by immense amounts of energy. If an individual or organization were to try to undermine Bitcoin’s core encryption, it would require impossible amounts of energy, specialized computers, and space. Bitcoin is the most secure computing network in the world.

Unlike traditional bank accounts, anyone, anywhere can connect to the Bitcoin network. Bitcoin is an censorable and global network for transacting value.

So long as the above properties are useful to people across the world, Bitcoin will have value.

How can I buy Bitcoin?

You can create an account on Coinbase or an increasing number of other reputable financial technology companies to buy, send, and receive Bitcoin. Bitcoin is also increasingly accessible via traditional financial portfolios, for example in October 2021 the first Bitcoin futures-based ETF was approved. (ETFs are a popular way for investors to gain exposure to an asset like gold or tech stocks, and now Bitcoin.)

Released: January 2009, Courtesy Coinbase.com

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