Thread by @atareh

Last week, $60 billion dollars of marketcap was wiped out in crypto.

This is the story of one man's stablecoin, that mutated into a monstrosity that collapsed the entire ecosystem and caused a massive downturn in crypto with it.

This is the story of @stablekwon and the Terra

@stablekwon 1/ So what really happened?

I'm guessing most of you still don't really know.

Yeah, you got a soundbite you repeat so you don't sound dumb, but cmon.

@stablekwon 2/ While the collapse blindsided most people, some did see it coming

While the #LUNAtics were having a big old party, some saw the giant lie at the heart of the Terra

a few weirdos and outsiders saw it early on and tried to warn everyone

We'll meet them later @freddieraynolds

@stablekwon @FreddieRaynolds 3/ Now before I get into the guts of this story, fair warning, you're going to hear a lot of DeFi terms like:

- Stablecoin
- Peg
- Collateral
- Algorithmic stablecoin
- Marketcap
- APY

It's pretty confusing, right? Does it make you feel bored? Or stupid?

Well, it's supposed to

@stablekwon @FreddieRaynolds 4/ DeFi loves to use confusing terms to make you think only they can do what they do.

or even better, for you to leave them the fuck alone.

But we don't have Margot Robbie in a bubble bath to explain, you're stuck with me

@stablekwon @FreddieRaynolds 5/ So, here's what you need to know:

1) Stablecoin: a crypto coin that matches the value of fiat (usually USD). Helps normies use crypto because it's familiar and not "volatile" 🙄

2) Peg: to match a value. UST was "pegged" to fiat USD so 1 UST *was* always = 1 USD

@stablekwon @FreddieRaynolds 6/

3) Collateral: proof that an asset is worth something because something else is backing it up (ex: when you buy USDC stable coin, they buy 1 fiat USD to keep in the bank)

4) Algo stable coin: a stable coin backed by user incentives instead of collateral or reserves

@stablekwon @FreddieRaynolds 7/ 5) Marketcap: the price of a coin * total available coins. How much a cryptocurrency network is worth

6) APY: annual percentage yield. Commonly used as a reward for "staking" your coins to get free coins at a percentage

Now, let's jump into the story

@stablekwon @FreddieRaynolds 8/ Terra was founded in January 2018, at the peak of the 17/18 bull run.

At the time, ETH was not second-largest cryptocurrency (surprisingly) - it was XRP (remember them?)

Things were very different back then

@stablekwon @FreddieRaynolds 9/ in hindsight, Jan 2018 turned out to be the top.

The total crypto market cap peaked at ~$800M in Jan 2018 and would proceed to bleed out to ~100M over the following year

Mant learned in the months and years to follow, that what goes up must come down.

@stablekwon @FreddieRaynolds 10/ and because bear markets are for builders and that was Do Kwon's mindset (@stablekwon)

Kwon took on the position of CEO of Terraform Labs to build:

"a protocol to create decentralized price-stable cryptocurrencies (stablecoins) to usher in crypto payment processing"

@stablekwon @FreddieRaynolds 11/ Their plan was simple:

1) Launch a coin to fund development
2) Launch stablecoins
3) Create a DeFi ecosystem to sustain their community
4) ???
5) Solve the global payments infrastructure

@stablekwon @FreddieRaynolds 12/ Specifically, the coins they launched were LUNA and UST.

LUNA held their ICO in Jan 2019, letting early investors buy LUNA for $0.80, which got them $62M

@stablekwon @FreddieRaynolds 13/ Then, a year and a half later, Terralabs launched their algorithmic backed stable coin TerraUSD (UST) in September 2020

(fun fact: they also launched TerraKRW, a Korean won stable coin earlier that year and spoiler: same fate as UST)

@stablekwon @FreddieRaynolds 14/ The idea of LUNA and UST was simple enough.

Since UST should always be $1 and that is dictated by how much UST is out in the market, Terra designed a way to mint or burn UST

@stablekwon @FreddieRaynolds 15/ When the price of UST > $1, you could burn LUNA to get equivalent value UST.

Why? because there was an arbitrage opp:

if 1 LUNA = $50, you get 50 UST for burning LUNA

if UST price was $1.1, then you sell 50 UST for $55

This selling pressure would balanc UST back to $1

@stablekwon @FreddieRaynolds 16/ and the opposite works as well,

if UST is at $0.95, then the arbitrage is to buy UST for cheap, and burn it for $1 LUNA

In the terra ecosystem, burning always gives you the $1 quote price, irrespective of what the market price is.

@stablekwon @FreddieRaynolds 17/ Again, this mechanism was built into their ecosystem and designed to always ensure that 1 UST = 1 USD

@stablekwon @FreddieRaynolds 18/ But how well did that actually work?

Did UST ever depeg from $1 before?

Well yes, and guess what bailed it out?

Not the proposed LUNA <> UST burn mechanism...

https://twitter.com/FreddieRaynolds/status/1486975826180644867?s=20&t=Q7ZEerJkdGUfhcypiqc1Gw

@stablekwon @FreddieRaynolds 19/ That's right, when UST Depegged from the dollar to 0.93 May 2021, a VC fund bailed them out with a couple hundred million...

So much for Burn/Mint mechanism...

@stablekwon @FreddieRaynolds 20/ But let's put that aside. That's one day and only one depeg event.

The Terra ecosystem is strong.

Ethereum was hacked before too and look at it now. and besides, have you heard about their savings program?

No? well, let me tell you all about it!

@stablekwon @FreddieRaynolds 21/ If the instability of UST didn't raise alarm bells, well how does free money sound?

Terra's first main product was a "savings platform" called Anchor. They promised you 20% APY on a stable coin.

Let me be very clear: that APY ABSURD, especially for a stable coin

@stablekwon @FreddieRaynolds 22/ That is the literal definition of Ponzi - because you were incentivizing people to hold and stake your currency,

so that they could get more free money, all the while promising that UST currency will always be pegged to the US Dollar.

🚩🚩🚩🚩🚩

@stablekwon @FreddieRaynolds 23/ While Terra said that the Anchor protocol made money and 20% was sustainable - that was a lie. They were dipping into their own reserves of LUNA and selling it to give people 20% annual return

@stablekwon @FreddieRaynolds 24/ But once again, nobody really gave it any thought. Free money, right?

At its peak, just before the crash, Anchor held $14 Billion dollars in UST

@stablekwon @FreddieRaynolds 25/ and it's at this point in the story I should formally introduce the Michael Burry of this story: @freddieraynolds.

Before the 2008 financial collapse, Burry was one of the first to notice that the housing market would collapse and proceeded to short the banks

@stablekwon @FreddieRaynolds 26/ I'll be honest - don't know much about Freddie except that he called out how vulnerable Terra was in November 2021

and for that, he was called "stupid + [redacted]" by Do Kwon 😂

@stablekwon @FreddieRaynolds 27/ What triggered Do Kwon to turn to 5th-grade insults was that @freddieraynolds detailed a plan on how someone with ~$1 billion dollars could destroy the Terra ecosystem (while making a shit tone of money too)

@stablekwon @FreddieRaynolds 28/ The plan was honestly simple - you can read the full thread below but in short, it's:

destabilize the UST $1 peg by repeatedly buying selling and converting large amount of LUNA to UST.

Do this enough and you'd start a death spiral

https://twitter.com/FreddieRaynolds/status/1463960623402913797

@stablekwon @FreddieRaynolds 29/ Why would this work?

Well, remember what I said 9 tweets ago?

No? K screenshot is below

The depeg to 93 cents in may of 2021 was solved by a VC fund dropping hundreds of millions to rescue it, NOT the mint/burn mechanism

Not very stable, @stablekwon

@stablekwon @FreddieRaynolds 30/ But even still, nobody believed @freddieraynolds - or at least very few people did.

Do Kwon responded professionally (for once) and still said this sort of attack was impossible

https://twitter.com/stablekwon/status/1464943691143921664?s=20&t=Q7ZEerJkdGUfhcypiqc1Gw

@stablekwon @FreddieRaynolds 31/ And yet, here we are, with LUNA and UST both sitting close to $0.

It's hard to say if someone deliberately used Freddie's thread as a blueprint to attack the Terra ecosystem,

but we do know that a large whale with $1 Billion in UST started the initial depeg on May 7

@stablekwon @FreddieRaynolds 32/ That would be the last day UST would hit $1, because as each day passed, more and more people panicked.

The longer the price stayed below $1, the more people pulled their UST out of anchor, which led to more people selling.

A death spiral, just like @freddieraynolds said

@stablekwon @FreddieRaynolds 33/ All it took to break a 60 billion dollar ecosystem was an opportunistic attacker with a billion dollars

Was it an attacker? Where did they get that from? Is Citadel behind this? or eas it the US Fed?

Conspiracies have been running wild, but it misses the point entirely

@stablekwon @FreddieRaynolds 34/ when you play the game of crypto, you win or you die.

If your ecosystem can be taken down in such a fashion, it shouldn't have existed in the first place.

Financial systems need to be anti-fragile - they should be able to take on little tremors and big earthquakes

@stablekwon @FreddieRaynolds 35/ Otherwise, you will get exposed, which is what happened here.

But why did the overall crypto market drop that week as well?

Well, the market was already headed down because the US increased interest rates, but of course, Do Kwon's actions played into this

@stablekwon @FreddieRaynolds 36/ You see, in January 2022, Do Kwon started buying BTC - to be put in the Luna reserve as collateral...

Sidebar - I thought this was an algorithmic stable coin Kwon... I thought it didn't need collateral... wasn't that your whole point?

Why you gotta ruin my BTC bags too 😭

@stablekwon @FreddieRaynolds 37/ In total, the Luna Foundation Guard (LFG for short... smh🤦), amassed 80,000 BTC, or 3 billion dollars

So, they bought a wildly volatile asset, to backstop their wildly unstable stablecoin, and they thought that was a good idea

@stablekwon @FreddieRaynolds 38/ So, when the market downturn started on May 7th, along with the UST attack, they had to start selling their 3 billion dollars worth of BTC to "defend the peg"

This meant, there was going to be 3 billion dollars of selling pressure in Bitcoin

@stablekwon @FreddieRaynolds 39/ So like any good trader, people sold or shorted BTC too, which dropped it 25% from 36K to a low of 26K in 1 week

@stablekwon @FreddieRaynolds 40/ This is a long thread, and it barely even covers the surface of what happened in the Terra ecosystem, but this implosion has brought the world's attention onto crypto and web3 - and once again, for the wrong reasons

@stablekwon @FreddieRaynolds 41/ There is now talk of major regulation coming to stablecoins, stories of people committing suicide and who knows what else.

@stablekwon @FreddieRaynolds 42/ In the end, it's not Do Kwon, Terra or its employees, or their investors that held the bag.

It was regular people - people that bought into a vision. People that hoped for a better life - and they were screwed.

@stablekwon @FreddieRaynolds 43/ What's going to happen? Should someone go to jail? Why is Do Kwon paying people to publish articles that downplay his net worth?

https://twitter.com/FatManTerra/status/1526459450193764353?s=20&t=_dUmd3GDAD4rhfZXlNd8OA

@stablekwon @FreddieRaynolds 44/ I don't have the answers, but I hope something meaningful happens and people are made whole in some way.

Every time an irresponsible actor comes into the space and promises riches, and ultimately fails to deliver, more people get turned off and burned by web3

@stablekwon @FreddieRaynolds 45/ We only have so many chances to get this right - so let's not get caught in the spell of a boisterous leader again.

Let's put our money behind ethical people and ethical companies.

@stablekwon @FreddieRaynolds 46/ You can read the unrolled version of this thread here: typefully.com/atareh/gMGyXrF