An entire cryptocurrency ecosystem worth over US$50 billion was wiped out in a few short days. According to the experts, an unknown trader —or group of traders — used the methods of an “evil genius” to do it.
Crypto investors have seen their portfolios take another substantial beating, as roughly $200 billion ($290 billion AUD) was wiped from the crypto market following the total destruction of a major cryptocurrency.
On Tuesday last week, the 7th largest cryptocurrency by market cap, Terra (LUNA), collapsed to zero, nearly taking the entire crypto market down with it. Social media went haywire, with users posting a host of different theories about the collapse, while tens of thousands of unlucky investors posted details of their losses across Twitter and Reddit.
Following the brutal implosion of the Terra ecosystem, Bitcoin (BTC) dropped below $US25,500 for the first time since December 2020. The crash has only been made worse by the broader market downturn in the “real world” economy, as investors continue to sell their more speculative assets such as tech stocks and early-stage companies.
So, how did a cryptocurrency that was worth more than $30 billion ($44 billion AUD) go to zero in a matter of days? According to some experts, an “evil genius” might be at the center of this mystery…
How It Was Supposed To Work
To keep it as simple as possible, LUNA was a cryptocurrency that powered a “stablecoin” called TerraUSD (UST). A stablecoin is a digital asset that has its value “pegged” to a real asset, typically the US Dollar.
While most stablecoins like Tether (USDT) and USD Coin (USDC) are backed up by reserves of physical cash — TerraUSD was an algorithmic stablecoin. So, when the value of TerraUSD dipped below $1, it could be swapped for LUNA tokens at a small profit by using a series of complicated-sounding “smart contracts.”
How It All Went Wrong…
Theoretically, this was supposed to keep the value of TerraUSD pegged to $1 while simultaneously increasing the value of LUNA.
Unfortunately, something (or someone) caused these smart contracts to stuff up, creating a brutal “death-loop” where TerraUSD lost its peg so harshly that investors rushed to sell their LUNA rather than try to stabilize the value of the TerraUSD coin — tanking the price of both assets simultaneously.
Is An “Evil Genius” To Blame?
While no one legitimately knows exactly what caused the Terra ecosystem to implode, Lisa Wade the CEO of blockchain-finance company DigitalX told ABC that her understanding of the situation may seem almost like a conspiracy theory to some.
“It’s almost like an evil genius plot, because there are a lot of steps to it.”
Wade said that as part of the evil and complex plot, the traders appeared to have purchased around $1 billion worth of UST stablecoins, while simultaneously “shorting” Bitcoin.
“What they did next was they timed the market…they waited until a Saturday night when [trading] volumes were very low, and there were no bids.”
“And then they went into a trading pool and started selling UST in massive volumes, which then triggered all of the subsequent selling in a low-volume market that broke the [US dollar] peg.
“Inside the algorithm was what our team had identified as a ‘death spiral’ … the selling starts to feed on itself from the mechanics of the algorithm.
“So when the death spiral kicked in … the algorithm started selling Bitcoin and Avalanche (AVAX), which triggered more selling…
“Luna was impacted because it’s the underlying [backer] of the UST. So every time UST is bought, LUNA gets burnt, which means there’s less tokens in supply, so the LUNA price goes up.
“And if there’s no buyers and the price goes down, then it starts to feed on itself, because people start panicking and selling LUNA.”
What Does This Mean For Crypto?
Unfortunately, while these traders most likely made bank on this trade, tens of thousands of other crypto investors lost considerable amounts in the fallout, with Links to suicide prevention resources being posted across Crypto Twitter and at the top TerraLuna Reddit page.
Wade summed it up well by saying that while this sort of trading activity isn’t technically illegal, the ethics of it were “questionable.”
Wade also believes that this is really not a good look for cryptocurrency more broadly, as it will likely lead to major regulation of the crypto industry being looked at more critically throughout the world.