For the first time since the collapse of the Earth (LUNA) in May, the network’s co-founder, Do Kwon, decided to talk about the events. The exclusive interview came out on the Coinage portal and is part of a series that chronicles the collapse of the network and stablecoin UST. According to Kwon, Earth’s collapse didn’t just happen because of grid problems, but because of internal sabotage. That is, someone from within the blockchain team triggered the events that caused the network to lose 99% of its value within a few days. However, Terra’s co-founder also admits that the ecosystem had flaws, especially in terms of how the UST works. Furthermore, Kwon claims that both Earth and UST fell victim to their own transparency, which made it easy for invaders to attack.
Transfer of funds and work
Before the collapse, LUNA was the fourth largest cryptocurrency in the world by market cap. The total value of the network amounted to around US$40 billion, or R$201 billion in current values, which, in theory, would make the Earth “too big to fail”. The meltdown began with a transfer of funds between trading pools on the night of May 7th. The transfer took place in Curve’s pools, but took place without authorization from Terra. As a result, the transaction left the Curve pool with an imbalance on the LUNA token side. That is, less LUNA remained in the pool, which reduced the UST’s ballast. The stablecoin, it is worth remembering, was backed by the LUNA token and a balancing algorithm. Within 13 minutes, some unknown traders sold $200 million in UST. The trend continued the next morning, which left the trading pool with a lingering imbalance. The next day, May 8, the UST dropped to $0.99 and lost parity with the dollar. This anomaly could have been corrected, as it is not an entirely uncommon phenomenon. But in this case, the situation went from bad to worse, causing one of the fastest crashes in market history. “The sentiment on Twitter started to get worse. And then there were more people trading against Curve pools,” Kwon recalls. Bets against UST, in turn, have further driven down the value of the stablecoin and LUNA, affecting the entire ecosystem.
feeling of helplessness
Kwon felt powerless to contain the attack as his executive team was flying to Singapore to attend a quarterly meeting at Terraform Labs (TFL) headquarters. That is, there was no one from the team available to contain the situation. However, Kwon highlights precisely two factors: the timing of the transfer of the fund and the absence of Earth’s top executives due to an official commitment. According to the executive, both information was privileged – only TFL people knew about these facts. This is why Kwon claims the attack took place either with direct action or with the help of someone inside the TFL, although he doesn’t know who may have carried out the action. “The only people who knew they were TFL employees. So if you’re asking me if there was an insider at Terraform Labs, the answer is probably ‘yes,’” he said.
UST problems
The interview addresses other issues central to the collapse of the Earth network. For example, the backing of UST, which did not have dollars stored anywhere. Instead, the network was backed by the LUNA token itself. However, Kwon claims that the network had to solve a problem: why will people keep their dollars in UST if there is nothing else? The answer was the Anchor Savings Protocol, which promised a 20% annual return to anyone who staked LUNA and UST. The protocol catapulted the market value of Earth, but it paid a very high annual return. By way of comparison, the largest banks in developed countries paid interest between 1% and 2% per year. The 20% of the Anchor, therefore, proved to be unfeasible. There was only one solution for the network to avoid insolvency – a continuous flow of funds to Anchor through wider adoption. But the project ran into trouble and broke down before that happened. “When anonymous traders attacked on May 7, Anchor’s limit was reduced to just 45 days. After that, the protocol would need another cash injection. And since all of this was happening on a transparent blockchain, anyone could see the end of the road looming on the horizon,” Kwon said. Finally, the transparency of the protocol allowed everyone to see the crisis happening, and to bet against the protocol. And the collapse was inevitable. Also read: ‘NUcoin’: Nubank intends to launch its own cryptocurrency Read also: Tezos will open an office in Rio de Janeiro to expand the project in Latin America
