The Crypto Reset Explained | Terra Luna 2.0
11,842Explaining the crypto reset of Terra Luna 2.0
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WHAT IS THE CRYPTO RESET?
So far this year crypto has lost a trillion dollars off its market cap but one of the reasons why it has been going down is because of a stable coin project you may have heard of called Terra Luna - today it was reset to Terra Luna 2.0.
HOW BIG WAS TERRA LUNA?
This project was in the top 10 coins by market cap, it had a market cap of over $40 billion and became the second biggest De-Fi project in the whole crypto space - right next to Ethereum. In just one month in 2019 - they raised over 62 million dollars from their ICO.
The project had financial backing from some of the biggest names in the space like Galaxy Digital for example which put up $25 million, another VC called Chiron Capital which raised over $50 million but in total LFG - the luna foundation guard which is the thing that governs the project - raised over $3 billion. The project failed and some people lost their entire life savings.
WHY DID TERRA LUNA COLLAPSE?
It started with the "Anchor Protocol" which promised to pay a 20% yield on their deposits. This got people so excited that the project grew from $1.1 billion TVL (total value locked) in May of 2021 to over $17 billion by May 2022.
WAIT WHAT?
If you’re keeping track so far - $17 billion dollars locked in Anchor at 20% means that someone has to pay their users $3.4 billion dollars per year to keep people incentivized to stay vested.
By May 6th, this year - they were down to $200 million in their reserve wallet which was less than a month’s worth. To prevent a run on the bank or a sell off - the Luna Foundation Guard started to buy Bitcoin to protect UST from “de pegging from the dollar” - in other words - they wanted to make sure 1 UST was worth $1. This made them extremely vulnerable to an attack.
HOW DID TERRA LUNA GET ATTACKED?
Liquidity - in other words, the amount of money that’s trading every day between all platforms was only 6 to 7 hundred million dollars so the exit was very narrow.
LIQUIDITY?
If you’re confused what that means - imagine you’re at a concert - there’s 10,000 people there but there’s only 1 door. That door fits 2-3 people at a time. If something scares people and causes them to run - imagine trying to squeeze 10,000 people through a narrow door. It would be a chaos and there would be a lot of damage. That’s exactly what happened.
HOW TO STAY SAFE IN DEFI:
1. Stablecoin projects are not perfect, when you see promises of a stable coin - please understand they are risky experiments that can unravel instantly over a virtually unlimited amount of reasons.
2. Always always always know where the yield is coming from. If a project promises to pay you an interest rate - no matter how small or how big, know where it’s coming from. If the interest comes from lending - that’s different than if the interest is entirely funded by an organization because funds eventually run out.
3. Pay attention to liquidity. If the liquidity is thin (there are more sellers than buyers) - it's much easier to manipulate the price.
WHAT IS TERRA LUNA 2.0?
Proposal 1623 which was a proposal passed by the community with a majority consensus of 65%. This new Terra coin will have its own what’s called Genesis Block - meaning it’s not a hard fork of the previous one.
The old chain that was attacked will be called Terra Classic with the ticker symbol LUNC and the new project will be inherit the old name of Terra with the ticker symbol LUNA. Read more here: https://agora.terra.money/t/terra-ecosystem-revival-plan-2-passed-gov/18498
SOURCES:
https://onchainwizard.substack.com/p/onchain-wizard-understanding-the?s=r
https://www.cryptoglobe.com/latest/2022/03/luna-foundation-guard-has-raised-2-2-billion-for-terra-stablecoin-usts-btc-reserves/
*None of this is meant to be construed as investment advice, it's for entertainment purposes only. Links above include affiliate commission or referrals. I'm part of an affiliate network and I receive compensation from partnering websites. The video is accurate as of the posting date but may not be accurate in the future.
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