84 million US dollars leveraged a 40 billion financial empire, the beginning and end of UST's collapse

Original author: 0x137, Rhythm BlockBeats

In 1997, the legendary financial killer Soros and his giant crocodile allies hunted the bubble market in Southeast Asia, sold a large number of Thai baht and quickly depleted the 30 billion US dollars of foreign exchange reserves of the Bank of Thailand, and finally forced the Thai baht to implement a floating exchange rate system, further pushing Southeast Asian countries into the financial market. The abyss of crisis.

In 2008, the Wall Street investment banking giant Lehman Brothers was exposed to a large number of sub-credit bad debts, and its net liabilities far exceeded the company's market value by several times.

These epic capital confrontation stories have been spread all over the streets and alleys of the world in the past ten years, becoming historical landmark events, and being studied repeatedly as textbooks. But who would have thought that the same story would be staged again in the encryption market with only 10 years of development history, and "real-time broadcast" in front of everyone through the traces on the chain.

On May 10, due to capital siege and debt crisis, the native algorithm stablecoin UST of the Terra ecology experienced a serious unanchor event, falling as low as $0.6. This second largest public chain ecosystem with a TVL of nearly 20 billion US dollars repeated the horror disaster of Thai Baht and Lehman in just 2 days.

Margin Call: UST Crash Life and Death Speed

As the second largest public chain ecosystem in the encryption market, Terra has always been a subject of controversy. On the one hand, through the Luna-UST dual-currency mechanism, Terra Ecosystem has successfully promoted its own algorithmic stablecoin UST to the entire encryption market, rapidly increasing the price and market value of Luna; It has been criticized and generally regarded as an unsustainable "Ponzi scheme". (Rhythm note, for more information about the Luna-UST and Anchor mechanism, please refer to the Rhythm article "Analysis of Terra Ecology: Understanding LUNA, Mirror and Anchor Token Economics" and "The interest rate of stable currency has been as high as 20% for a long time. Is Anchor also a Ponzi?" ?”)

For a long time, Luna's supporters and skeptics have been very extreme. Supporters call themselves the "Lunatics" army (meaning "crazy" in Chinese), attacking and mopping up comments criticizing the Luna mechanism on social media platforms such as Twitter every day; The day of Luna's collapse has arrived. Such an extremely "tension" ecology is hard to be ignored by speculators. These capital killers are always paying attention to the direction of the industry, waiting for the best hunting moment.

After the Federal Reserve announced another 50 basis point rate hike, the opportunity finally came. Since May, the Nasdaq index has continued to decline, and the market’s response to the macro situation has been extremely pessimistic. The price of Bitcoin has also fallen by nearly 10% for several consecutive days, and panic has spread rapidly throughout the encryption market. The Terra ecological core team LFG (Luna Foundation Guard) announced that it will adjust the UST-3Crv liquidity pool (UST's main on-chain trading venue) on May 8 to prepare for the establishment of its own powerful 4Crv pool.

All kinds of conditions created a perfect storm for capital hunting, so on the night of May 8th, the giants in the currency circle quietly launched their long-planned "encirclement and suppression plan".

Phase 1: Take advantage of the UST-3Crv pool divestment gap to launch an offensive

In the early hours of May 8th, LFG withdrew USD 150 million of UST liquidity from the UST-3Crv pool in preparation for the establishment of the 4Crv pool. UST liquidity actually only needs about 300 million US dollars.

About 10 minutes later, a new address suddenly sold 84 million US dollars of UST, which seriously affected the balance of the 3crv pool.

In order to maintain the balance of liquidity in the UST-3Crv pool, LFG withdrew another US$100 million of UST from the fund pool.

At this time, rumors began to appear on Twitter, saying that the sell-off was directed and acted by LFG, and Terra founder Do Kwon immediately responded on Twitter.

It didn't take long for multiple whale accounts to sell UST on Binance, with each transaction amounting to a million dollars.

Affected by the sell-off, UST began to decouple. At this time, the address suspected of Jump Trading (UST market maker) sold a large amount of ETH to buy UST, trying to stabilize the anchor of UST.

Up to now, this address has sold more than 50,000 ETHs to maintain the UST anchor, and there are currently less than 13 ETHs left on the address.

Until then, the attack was mainly done through the UST-3Crv pool, involving an amount of about $300 million. If LFG's $4 billion 4Crv pool had been established before this attack, the above attack would not be effective.

The second stage: Anchor funds fled in large numbers due to panic

Due to the small decoupling incident in the early morning of the 8th, panic spread rapidly among UST and Luna holders. Starting from May 8, a large amount of UST locked in Anchor flowed into the market, further causing UST selling pressure.

During this period, LFG announced to "loan" its $700 million bitcoin savings to maintain the stability of UST.

But according to Do kwon, UST above $0.95 is not considered decoupling, so Bitcoin will not be used above this threshold.

This also explains why UST has not returned to the $1 anchor after the decoupling on the 8th.

However, LFG did not expect that the long-term failure of UST to return to anchoring brought great negative sentiment to the market. UST, which escaped from Anchor, began to sell on a large scale, and UST anchoring fell below the $0.95 threshold. LFG was forced to start liquidating Bitcoin savings, when Do Kwon tweeted again: "More funds are being mobilized."

Subsequently, an address starting with "0x599" began to absorb UST circulating in the market on a large scale, with an amount exceeding US$200 million.

This also quickly rebalanced the UST-3Crv pool, but the Bitcoin liquidation further drove its price down, and the market sentiment continued to deteriorate, leading to a large-scale liquidation of Luna, UST selling pressure further increased, and the UST-3Crv pool soon fell into out of balance.

On the morning of May 10th, Jump Trading and LFG may have realized that something was wrong, and stopped selling Bitcoin savings to protect the anchor. Despite the deterioration of the situation, UST plummeted all the way to $0.6. Although the anchor price rebounded later, the ratio of the UST-3Crv pool on the Curve platform was still seriously skewed, and the ratio was once 91.37%/8.63%.

The third stage: behind-the-scenes transactions, rumors of institutional rescues began to spread

After UST triggered the "horror 2 hours" of the death spiral, there began to be rumors that Jump, Alameda and other institutions had reached some behind-the-scenes deals and were preparing to invest $2 billion to start the rescue. Subsequently, an address starting with "0x6c" did receive a transfer of 2 billion U.S. dollars, but there was no major action, and the address has not yet been seen to be related to the UST incident.

In addition, Binance also seems to be involved in the UST defense battle. According to Hasu, the director of "Uncommon Core", Binance forcibly set a trading floor price for the UST order book, and users were unable to submit orders under the $0.7 threshold for a long period of time.

This morning, news about LFG's financing came out again. According to sources, LFG is seeking help from institutions, hoping to raise US$1 billion to support UST. According to Larry, a researcher at The Block, the current financing details are: Jump Trading, Celsius, and Jane Street have agreed to the financing, with a commitment of about US$700 million, and Alameda Research has not yet agreed. The institution's condition is to get LUNA spot at a 50% price discount, lock it for one year, and unlock it linearly every month after one year. But at the same time, Larry emphasized that the financing has not yet been confirmed, and everything may change.

Regulatory Shadows: Praying Mantises Catch Cicadas, Orioles Follow

While the current talk of UST unanchoring is all speculation, we have found extremely reliable information in the market. On the morning of May 10th, Raoul Pal, a well-known macro investor and founder of Real Vision, interviewed Do Kwon, founder of Terra, about the unanchoring of UST. Although the content of the conversation has not yet been broadcast, in the subsequent interview with Bankless, Raoul still revealed that Some details of this incident.

"It's very simple. UST has decoupled. Jump Trading, as a UST market maker, was forced to sell its own ETH to buy UST, and then LFG was also forced to liquidate its own Bitcoin positions." When talking about UST decoupling, Raoul briefly Explained the incident clearly, and immediately added: "This is a typical Margin Call, just like someone patted Luna on the shoulder and said "give me back my collateral", similar things happen every day in traditional finance. staged".

Indeed, the amount that triggered the death spiral of UST this time did not exceed 300 million US dollars, and the current result is only billions of dollars. Compared with traditional finance, it is indeed insignificant. But the most incredible thing is that it happened in full view, which is extremely rare in the traditional financial world. Thanks to the blockchain, we are fortunate to witness the first large-scale "Thai baht + Lehman" event in the history of encryption development.

In fact, Rhythm has explained the UST and the entire algorithm in the previous articles "The Lord of the Rings Dream of Algorithmic Stablecoin: After LUNA" and "Dialogue with Luna Founder Do Kwon: UST's Bitcoin Gambling". The endorsement dilemma in the stable market, as well as UST's own coping strategies.

This time, UST’s severe de-anchor is not the first time that Luna has triggered a death spiral. On May 19 last year, UST also experienced a serious de-anchor, and the price fell to $0.85. Finally, under the rescue of LFG, Luna and UST were able to survive and develop . Since then, in order to prevent similar incidents from happening again, LFG has made a series of changes, including the new endorsement mechanism of UST.

In fact, buying native tokens of Bitcoin and other L1 public chains as an endorsement is not a wrong choice, but it will take some time to realize the complete delivery of this new mechanism. Had LFG's $4 billion 4Crv pool been formed, a crash like this might not have happened at all. But it is a pity that the market did not leave enough redemption opportunities for Do Kown, a Luna maniac. The collapse of Luna this time was lost to time.

Veteran DeFi players should know that the impact of this UST unanchoring may not only stay in the Terra ecology, just like the bankruptcy of Lehman Brothers, the collapse of the Luna ecology may affect the entire encryption market. But in the eyes of many people like Raoul, the worst impact of this unanchoring incident is actually at the regulatory level. The "mantis catching cicadas" of the crypto giants this time may also attract the "regulatory orioles" behind them. .

We know that the central banks of various countries have been vigorously popularizing their own digital currencies (CBDC) in recent years. UST, which is the “top card” in this way, is undoubtedly a perfect excuse for the regulators. Putting aside the question of whether UST can regain confidence, the previous remarks about "UST unanchoring may attract supervision" have begun to spread widely on Twitter, causing many people to worry.

Sure enough, the outlet for supervision came on the night of the incident. According to Rhythm news, at a meeting on Capitol Hill on May 10, U.S. Treasury Secretary Yellen talked about the regulation of USD Stablecoin in the encryption market. Yellen believes that the legislation of USD Stablecoin regulation is imminent. Bringing huge risks, as we all know, Terra UST has experienced a round of decline today.”

Undoubtedly, the collapse of UST once again cast a regulatory shadow on the entire stable track. Now we have to think about whether regulatory agencies in various countries will launch a "regulatory siege" against stablecoins in this regard? Will the future encryption market lose "sovereign freedom"?