May 2022 has been a rough month for every crypto holders, especially for LUNA holders.
LUNA was a top 5 cryptocurrency in terms of marketcap and with 20+ billions of marketcap. Who would’ve thought that the giant moon could collapse from a full moon into eclipse 🌕 → 🌑
Many understood the risk of investing in LUNA, including myself, but the bullrun has blinded most of us.
Case Study:
What caused the fall of the giant blue chip?
Disclaimer: What can be attacked, it will be attacked one day.
Blackrock and Citadel borrowed 100k $BTC (~4 Billion USD worth as $40,000 per $BTC) from Gemini (it appears in their loan book)
Blackrock and Citadel swapped 25k out of the borrowed 100k BTC into $UST; this was all done quietly in anticipation of the attack.
When the price of $BTC moving up (due to the announcement by Do Kwon, LUNA Foundation Guard(LFG) buying $BTC to defend the $UST peg), Blackrock and Citadel called the LFG and said that they wanted to sell a gigantic bag of $BTC but they do not want to move the market and asked LFG if they are willing to buy those 25k $BTC at a discounted price in exchange for $UST.
Do Kwon/LFG thought they’ve saw the opportunity but eventually they’ve fallen into their trap. LFG sold significant amount of their $UST holdings in exchange for the *discounted* $BTC. Hence, the $UST liquidity reduced significantly. (Lower liquidity, higher spread, price became easier to be shaken)
After the completion of the OTC deal, Blackrock and Citadel still have 75k $BTC remaining but they also have a huge chunk of $UST.
Blackrock/Citadel dumped all of the $BTC and $UST causing massive slippage and triggering a cascade of forced selling in both assets. They are able to move the market as their size is the real chad size. (When $BTC falls, mostly the other cryptos will follow and $LUNA dumped too, $UST starts to depeg as they sold a huge chunk of $UST on centralized exchange)
Blackrock/Citadel knew that Anchor Protocol(borrowing and lending protocol on terra ecosystem) held massive amount of bLUNA(bonded asset as collateral) as many users were providing their LUNA as collateral to borrow more $UST and to deposit back into the protocol to earn 20% APY on $UST.
When the crypto market crash, the $LUNA crashes too, users will be facing margin calls or liquidation as their collateralized value (LTV) falls below the healthy factor. Users either have to sell their $LUNA position to cut their losses, or they need to buy more $LUNA to deposit more as collateral to increase their health factor. Due to bearish sentiments, people would choose to cut losses instead of buying the dip. LUNA crashes faster than expected as many were rekt by the liquidation call and also selling of $UST will create more LUNA in circulation which triggering the hyperinflation(as LUNA do not have a fixed supply) into the ‘Death Spiral’.
When liquidation happens, more assets will be sold on market, borrowed $UST taken back and released back to the market and increased the selling pressure of $UST. First $UST depegs was done by the attacker, although it was defended by some Venture Capitals, but they have created a second round of selling pressure which came from the fear of users. 20 Billion $UST from Anchor Protocol to bail out, VCs do not have enough money to defend the pressure from the retail investors. These forced withdrawals/selling triggered more than Anchor can pay, which trigger massive selloff in LUNA and driving the market further into the goblin town.
Blackrock/Citadel can now buy back the $BTC cheaper as the entire market crashed by them to repay their loan at Gemini and pocket the difference. Billions of longs wiped out.
LFG/Do Kwon/Venture Capitals ran out of ammo to defend the peg. Death spiral kicks in. $LUNA went from $66 to $0 in 2 days.
Insane level of market manipulation.
Flaws of LUNA Classic (LUNC), previously LUNA.
Do not have fixed supply minting of LUNA per day.
Unbacked algorithmic stablecoin $UST relied heavily on $LUNA in defending the peg.
$BTC plan to defend to $UST peg came too late.
Anchor Protocol unsustainable 20% APY yield.
LFG held too much $UST supply from the beginning(centralized).
Founder has too much ego.
Feel free to drop a like if you enjoy the newsletter. Would appreciate if you share the newsletter with your friends! 💖
✓
Don't be shy to leave a comment below if you have any questions!