Who is behind the collapse of LUNA

Several million users suffered a 100-times price fall of the LUNA coin, which dropped from $87.1 to almost $0.01 per coin in 6 days (from May 07 to May 12, 2022). The losses totaled several tens of billions of dollars.

TokenScope Team has analyzed this case and the reasons of the loss on the request of one of our clients.

Terra blockchain was launched in 2018 by Terraform Lab service owners Do Kwon and Daniel Sheen. The Terra network was one of the first to provide the creation of stablecoins linked to fiat currencies thought the Tendermint Delegated-Proof-of-Stake (DPoS) mechanism. The platform's token is the LUNA cryptocurrency.

The practical application of the project such as Asian e-commerce markets, the connection with the UST algorithmic stablecoin, large investments from various crypto funds, private investors together with the advertising campaign promoted the LUNA coin rather well. In 2021, the coin's price soared from $0.6 at the beginning of the year to $99 at the end. In April 2022, the price reached a record of $116.

LUNA capitalization at its peak was $81 billion and UST was $19 billion, respectively. The coin became popular on more than 30 major cryptocurrency exchanges, which strengthened investors belief in its stability and growth prospects.

The overall trend of LUNA over the last year has been very positive - the coin has been growing, attracting new investors, what could be the reasons for such a sharp drop?

Considering the determination of the reasons for a sharp price drop of a coin, one should always ask in whose interest certain actions are taken and who could benefit from it.

In the cryptocurrency market, given the information on most transactions in the blockchain is recorded, it is often possible to "rewind" and evaluate certain actions of the market players and overlay the news background on these movements.

Let's try to take a step-by-step look at the chronology of LUNA's fall, triggered by a major "whale" and actions in the information backgrounds of the crypto community:

• On May 09, 2022, a major coin holder (presumably a "whale" who borrowed 75 000 BTC and 1 billion UST) opened a short position on LUNA and simultaneously sold 75 000 BTC, that provoked market panic, high volatility and price drops of UST and LUNA.

• On the same day, 350 million UST were sold on the Curve decentralized exchange in a moment of liquidity transition from 3pool to 4pool, triggering a "decoupling" of the dollar from UST and giving a start to the slide of the stablecoin rate.

• The UST dump was also activated by the sale of nearly 650 million UST on the Binance exchange thereafter.

• As a consequence of the UST stablecoin drop, due to the peculiarities of the Terra protocol architecture, the LUNA coin hyperinflation occurred and began its uncontrolled decline.

• At the same time, social networks like Twitter and Reddit were spreading the information about LUNA and UST falling using bots, which strengthened panic moods and pushed investors to fix assets as well as mass withdrawal of liquidity from Anchor protocol, which created a new wave of coins price decrease.

• The frenzy of withdrawals and spam transactions overloaded the Terra network, which temporarily were out of service, resulting in borrowers being unable to make timely deposits or repay loans, which subsequently led to the mass liquidation of all Anchor protocol collaterals.

This series of events led to the uncontrollable fall of LUNA, enormous losses of investors and blocks of the coin trades on most exchanges. Thus, on May 13, 2022, Binance suspended operations on the entire Terra platform.

According to some experts, presumably, the borrowed funds which brought down LUNA and UST were taken by the Terraform Labs group from Alameda Research FTX.

It's premature to make a definite conclusion that the creators of the LUNA project were involved in the directed collapse of the coin, but there is an information that must certainly be taken into account.

Terra creator Do Kwon is reportedly involved in the creation of at least one cryptocurrency scam project. The Basis Cash Algorithmic Stablecoin (BAC) was launched in 2020 and made an exit scam in 2021, with the coin's price collapsing from $147.96 to less than $0.01. BAC's collapse was not widely discussed. The coin's capitalization reached $54.6 million.

In addition, according to the cryptocurrency community, Do Kwon had no communications with less than $1 million investors and was not engaged in the fixing of logical errors in the protocol, which also characterizes his attitude to the project.

It is also worth mentioning an interesting coincidence, that speaks in favor of the fact that the actions of interested parties were aimed at crushing of the LUNA. Thus, on May 11, 2022, the day before the coin's collapse, the Celsius cryptocurrency lending service withdrew over $500 million in ETH from the Anchor protocol, funds that were put into the protocol in advance, back in December 2021.

Taking into account the big financial losses of investors the proceedings concerning the purposeful scam of LUNA coin are just to begin and the version of collusion of the coin's creators with Alameda Research FTX, with the purpose of enrichment looks very plausible. TokenScope Team keep monitoring the situation with LUNA. Stay tuned for the latest news!