$5 billion evaporated in 2 hours, Luna is crashing

Author: 0x137, Rhythm BlockBeats

Describing the market sentiment since 2022 with the phrase "everyone is waiting for the apocalypse" couldn't be more fitting. Due to the overheating CPI index, the market has been filled with calls for interest rate hikes since the beginning of the year, 25 basis points, 50 basis points, 75 basis points…

Now the interest rate hikes have arrived, the market has collapsed, and people have welcomed the apocalypse they have long called for. Opening the financial news, the headline reads "Global stock markets experience the worst day in recent years," and the VIX fear index has reached a historical high since the outbreak of COVID-19.

In such a global crash, the phenomenon of "the Correlation of One" often occurs. When large-scale positions become exposed, people are forced to sell their other assets to fill the gaps, causing the prices of all assets to plummet.

This "panic selling" has also affected the crypto space, with Bitcoin and Ethereum both experiencing varying degrees of decline. Under the dual pressure of panic sentiment and capital encirclement, Luna has become the current crypto market's most tragic "victim."

This morning at 8 AM, due to the drop in Luna's price, large-scale liquidations occurred, triggering the "death spiral" that everyone was anticipating. As of now, Luna's price has fallen to around $29, and UST has de-pegged, dropping to a low of around $0.6, leading to the collapse of the Luna Ponzi scheme once again.

This death spiral is the most severe in the "UST de-pegging history." The topic of "Luna Ponzi," which is only discussed by hardcore players in the crypto space, even made it to Weibo's trending searches today.

What exactly happened? Let's sort out the entire process starting from early Sunday morning.

On the evening of May 8, whale alert accounts on Twitter began to go crazy with "alarms," with messages of UST sales every hour, each involving millions in transaction amounts.

At this time, UST had already experienced a certain degree of de-pegging due to selling pressure, and the liquidity of the UST-3Crv pool began to tilt, but LFG quickly stepped in to extinguish the fire and prevent further deterioration.

At this point, you might wonder, isn't UST's market cap $17 billion? How could such a small-scale sell-off threaten its peg?

That's right, UST is currently the largest algorithmic stablecoin and theoretically should have the capacity to withstand strong selling pressure. However, there is another protocol closely associated with UST: Anchor Protocol.

Sure enough, a quick check reveals alarming information. As of May 5, Anchor's TVL had risen to $18 billion, almost accounting for all of UST's market cap. In other words, almost all UST in circulation was staked in Anchor to earn a 20% APY!

Due to poor market performance, both whales and retail investors sought refuge in stablecoins, and because of the stable and extremely high APY, converting assets to UST and depositing them in Anchor became the most popular choice.

For UST and Anchor, this is proof of successful marketing strategies, but it also became a grave that LFG dug for itself. Moreover, many people liked to use Loop operations to increase their UST leverage, creating a large hole in Anchor's reserves.

To prevent UST from de-pegging, LFG had to ensure that the $18 billion UST locked in Anchor would not flee en masse, as there was almost no liquidity for UST left in the market. However, we know that some savvy whales discovered the problem last Sunday and began a "mass migration."

The small-scale de-pegging on May 8 had a significant negative impact on market sentiment, especially for Luna and UST holders. Starting from May 9, large amounts of capital began to flee Anchor, putting immense pressure on UST's peg. Seeing the situation deteriorate, LFG immediately took a series of aggressive remedial measures. Here’s a summary of the events:

May 9, 13:02------Lending BTC to protect UST's peg

LFG announced it would lend $750 million in BTC to OTC trading platforms to ensure UST's peg to the dollar. As the market normalized, LFG would then lend 750 million UST to buy BTC.

May 9, 14:01------Claiming not to reduce Bitcoin positions

LFG decided to deploy $1.5 billion in BTC/UST liquidity ($750 million for BTC and $750 million for UST) to alleviate market concerns surrounding UST. They also stated they would not liquidate their BTC holdings.

May 10, 08:11------LFG address received 28,205 BTC, worth $840 million

Early this morning, LFG transferred out approximately 42,530.8 BTC, worth $1.27 billion. They then transferred in 28,205.5 BTC, and as of the time of writing, that address holds a total of 28,205.5 BTC, valued at approximately $840 million.

With various remedial measures, the pegging situation of UST stabilized on May 9, but panic sentiment in the crypto market continued to spread. Yesterday, the entire market was in a bloodbath, which was a further blow to Luna. According to DeFi Alpha data, Luna would trigger the first large-scale liquidation around $42, followed by $35, $33, $29…

This morning at 7 AM, Luna fell below $42 and triggered liquidation, causing UST to experience a cliff-like de-pegging. Half an hour later, Luna fell below $35, triggering the second liquidation, and UST plummeted past its previous low of $0.85. Currently, Luna's price has dropped to $29, about to trigger a larger-scale liquidation, with the loan value reaching hundreds of millions of dollars.

Luna's plummet and UST's severe de-pegging have dealt an almost "devastating" blow to the Terra ecosystem, with the entire ecosystem bleeding profusely, TVL dropping by 40% to reach $13 billion, and the TVL of several leading protocols also suffering a "halving."

According to Coin Marketcap data, UST's market cap evaporated by nearly $4 billion within just a few hours this morning, currently dropping to about $14 billion.

As the largest "backstop" for UST, Anchor now has only $7 billion in deposits left, which means there are still $7 billion of UST "lost" in circulation, potentially ready to be sold off at any moment. To absorb the circulating UST in the market, Anchor's APY has also been rarely raised to over 20%.

In fact, this severe de-pegging of UST is not the first time Luna has triggered a death spiral. Last year on May 19, UST also experienced severe de-pegging, dropping to $0.85, and ultimately, thanks to LFG's rescue, Luna and UST were able to survive and develop. Since then, LFG has made a series of changes to prevent similar incidents from happening again, including a new backing mechanism for UST.

In reality, purchasing BTC and other native tokens of L1 public chains as backing is not a wrong choice, but fully implementing this new mechanism will take some time. Unfortunately, the market did not give Do Kwon, the madman behind Luna, enough opportunity for redemption; this time, Luna's collapse was a defeat against time.

Now, what choices will LFG make? Can UST regain confidence? We shall wait and see.