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How and Why Did Terra Luna Crash?

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Written By Paul Park
Paul Park is an educator, founder of a school, lecturer, public speaker, and writer. As a budding journalist, he hopes to establish a news media company based on NFT technology.

The market tumbles, and investors look for stable diversification, but DEFI has its risks. Do Kwon, George Soros, and Freddie Raynolds are the key people to pay attention to in observing over $40,000,000,000 losses in the Terra Luna crash.

The Terra Luna Crypto Crash Data

As this article is finalized (May 19th, 2022), 

TerraUSD 

  • The TerraUSD price per coin is $0.1276, 
  • down from $1.002 on November 21st, 2021. 
  • The TerraUSD current circulating supply is 11,279,545,647.81,
  • up from 2,863,353,316.45, on November 1st, 2021. 

Terra Luna

  • The Terra (Luna) price per coin is $0.0001813, 
  • down from $43.60 on November 21st, 2021. 
  • The Terra (Luna) current circulating supply is 6,532,216,141,541.07,
  • up from 400,688,918.81 on November 1st, 2021.

Stablecoins

A stablecoin is a cryptocurrency pegged to be like the US dollar or Euro, meaning that its price remains stable—meant to be less volatile than Bitcoin or Ethereum, which are considered significantly more vulnerable to liquidation factors. 

Investors turn to stablecoins when they want to earn a decent profit and avoid the usual volatility associated with crypto. Some popular stable coins are Tether and USD Coin (currently stable). Any stablecoin fixed to USD is supposed to maintain its value of $1 but not with TerraUSD & Terra (Luna). 

Made by the same developers and founded by Stanford Alumni, Do Kwon, TerraUSD is an algorithmically designed stablecoin, which means it maintains the same value as the official USD by using a complex mechanism with a related sister cryptocurrency called Terra (Luna). To maintain the price of TerraUSD, the Terra (Luna) supply pool adds to and subtracts from TerraUSD’s overall circulating supply. Users then “burn” or sell off Luna to mint* TerraUSD and even burn TerraUSD to mint Terra (Luna). There is no physical standard such as gold.

*Minting Coins 

Tokens, coins, and extended logs on the blockchain are “minted” or created when a cryptocurrency is essentially transferred to a new owner. There’s an ongoing sequence of network timestamps in a “proof of work” chain that represent a blockchain of timestamps from the keys of public owners. 

Satoshi Nakamoto’s Bitcoin Whitepaper 

Due to the algorithmic design, one can “always” exchange $1 of TerraUSD for $1 of Terra (Luna). Investors can quickly earn a small profit of 20 cents by selling their TerraUSD.

Supply and Demand – Millions, Billions, and Trillions of Coins Up in the Air

TerraUSD and Terra (Luna) are based on supply and demand. Last week, that system broke. People were largely holding Terra because of something called Anchor Protocol, where like a savings account, a user is paid interest for keeping their funds in Anchor Protocol. If this supply were to be rapidly liquidated or exchanged, as it was last week, it wrecks havoc. 

75% of the total TerraUSD circulation was located in Anchor Protocol. 

Coindesk

Based on a rumor that Terra management had decided to change the interest rate of 20% to a variable rate, investors began to diversify in search of better terms by exchanging their TerraUSD for other stablecoins, cryptocurrency, or ultimately to other financial markets. 

As the 24-hour volume climbed regularly from November of 2021, more and more Luna was minted (created, remember?). When supply goes up and demand is relative, prices generally go down.

Kaboom.

#where’s$LUNA –> everywhere because no one wants to own it.

A Bitcoin Update 

  • The world’s “first” crypto Bitcoin plunged to $25,400 the Thursday before Friday the 13th (Down from ATH of $61,374.28). 
  • The entire crypto market now has an approximate market capitalization of $1.2 trillion, 
  • less than half of the $2.9 trillion in November 2021. 
  • At least $3.5 billion in Bitcoin were untraceable after Terra’s price crashed. 
  • Luna Foundation Guard (LFG), a foundation set up by the Terra blockchain developers, had bought $3.5 billion worth of Bitcoin. Around $1.7 billion was sent from LFG wallets to a new address on May 9 in two transactions. It took a few hours to move in the whole amount via a Gemini crypto exchange. 

 

Freddie Raynolds Hypothesizes a TerraUSD & Terra Luna) Breaking Attack on November 26th, 2021 

An aspiring financial analyst named Freddie Raynolds outlines on Twitter: (SIX MONTHS AGO) how to profit from Terra Luna through high-frequency trading tactics, bots, loans, and supposed stable coins.

His Tweet Paraphrased 

A few weeks ago, Freddie Raynolds responded to @tbr90’s tweet with a brief outline of how a wealthy attacker could not only break @terra_money but also profit heavily simultaneously with a “Soros Style, Black Wednesday Attack”. He provided a detailed breakdown in which the gambit/play would require at least $1,000,000,000 in capital. 

Step 1. Buy long contracts of $LUNA valued at $100,000,000. This is a moneymaker. 

PnL Impact: $0 

Net PnL: $0 

Step 2. [Create the demand and first loop of the long contract. This is a completely different purchase than the long contracts. Totally different $LUNA] Purchase $100,000 of $LUNA and immediately take it out of the system by withdrawing it from the exchange and swapping it to $UST using the Terra seigniorage mechanism. Each transaction free is 0.5% of the amount swapped. Repeat this transaction 10,000 times with a bot so that you can accumulate $500,000,000 USD for $502,500,000. This step is preparation. [The system wasn’t meant for an investor to knowingly take a 0.5% loss.] 

PnL Impact: -$2,500,000 

Net PnL: -$2,500,000 

Step 3. Sell your initial $100,000,000 of $LUNA from Step 1 [the long contract(s)]. Since there has been $500,000,000 of $LUNA bought in step 2, and as Freddie analyzed the current order books and per annum, he believed or believes a reasonable estimate is +30% or $30,000,000 in profit. This is taking profits for future steps. [This post included a Google Doc link to Terra’s protocol, which has since been removed].

#pagenotfound 

PnL Impact: +$30,000,000 

Net PnL: +$27,500,000 

Step 4. Deposit $200,000,000 worth of bETH on #Anchor_Protocol and take a loan out for $100,000,000 $UST.

#staking 

PnL Impact: $0 

Net PnL: +$27,500,000 

Step 5. Purchase a short contract on $LUNA valued at $100,000,000.

PnL Impact: $0 

Net PnL: +$27,500,000 

Step 6. In $100,000 chunks, use Terra seignorage again to convert $500,000,000 of $UST from step 2 and $100,000,000 from step 4 to $LUNA. After each conversion, dump the $LUNA [on the open market]. The conversion fee of 0.5% and rate limit mean that this process will take approximately seven days. At the end of the week, you will have sold $600,000,000 worth of UST for approximately $597,000,000. Preparation fruitions. 

PnL Impact: -$3,000,000 

Net PnL: +$24,500,000 

Step 7. Close the $LUNA short contract from step 5. Since there has been $600,000,000 of $LUNA market sold in step 6, Freddie thinks a reasonable estimate here is -30% for $LUNA price or $30M profit. 

#takingprofitsfromcontracts 

PnL Impact: +$30,000,000 

Net PnL: +$54,500,000 

Step 8. Payback loan from step 4 and reclaim your bETH.

PnL Impact: $0 

Net PnL: +$54,500,000 

Step 9. Repeat. After a few iterations, the protocol will collapse at step 6. Many #Lunatics assume that $LUNA can never have a value of 0. This is only true if the future circulating supply of $LUNA isn’t infinity, but the above process leads to infinity $LUNA being minted, therefore making the possibility of a value of 0 a REAL POSSIBILITY, which we almost damn near saw happen last week. 

Freddie Raynold’s position as of his tweet: short $UST and long $LUNA 

If you short UST, you only lose whatever your interest payments are. By longing LUNA , you are exposed to unlimited upside and limited downside. 

So if I short $2,000 of UST after 1 year, I should only lose $200 in, let’s say interest payments. If I simultaneously hold $1,000 of LUNA and the Ponzi [scheme] continues, may it doubles in price so I gain $1,000. Net, I gain $800.

Now, if LUNA blows up tomorrow, I also win because I can buy UST to repay my load at cents on the dollar, which is +$2,000 and lost only $1,000 on my LUNA investment. 

Net gain of $1,000 [50%] 

Freddie Raynolds 

Freddie Raynolds explained how to profit from the mechanics controlling Terra Luna in a series of steps. utilizing bots and tactics from high-frequency trading, the Terra seigniorage system. Through exchanges amongst tokenized versions of $UST, ETH, and BTC, and a seemingly convoluted (it was certainly clear to Freddie R.) mess of loopholes, loans, and longs. 

To understand what happens after, “the protocol will collapse at step 6,” one must understand the term: “Soros-Style-Black-Wednesday-Attack”.

George Soros of the Quantum Fund and The Tom Yum Kung Crisis of 1997 

The economic growth in Thai real estate development had been booming in the ten years prior to 1998; returns were plentiful, and financing was easy. Your everyday company, your average Joe Thai, and anyone who knew how to create a bank loan application were encouraged to do so in Thailand. Definitely unbeknownst to them, was that a Thai Baht/US Dollar currency peg existed, and there are people in this world who look at macro systems down to the micro-steps like George Soros, and Freddie Reynolds. 

George Soros was/is a brilliant, but debatably unethical gentleman. As a hedge fund manager averaging 30% annual terms during most of his management term at Quantum Fund, George understands that business is timing. He either knowingly or in a casually unbeknownst way, triggered the 1997 Asian Financial Crisis, which has different names in each country that was hit. 

You see, in Thailand, investors are welcomed peacefully, kindly, and openly. 

And, George Soros is old. That means, for ten years before his 54 billion baht exchange, he was visiting Thailand. And, like any investor with tons of cash, he was probably welcomed with open arms in hopes of securing loans for potential ventures. The banks started to hear of his excursions in SE Asia and smell funds. Therefore, as a natural result, projects open, ventures are started, and financing is secured. This humble writer thinks George knew all of this. George dangled his money carrot and knew that foreign currency exchange methods existed, just like Freddie Reynolds identified the Terra seigniorage mechanism and the way to profit from the system…IF you had a BILLION dollars.

dun dun dunnnnnnnnn!!!!! 

What happened in Asia and what’s it got to do with a currency peg?

A currency peg is when a national government seals a specific, fixed interest rate between two or more currencies. 38 countries have exchange trade agreements with the United States and 14 have “pegged” their currency to the US dollar in hopes of growth and stabilization of local economies and the way commerce interacts and functions across borders in terms of trade, finance, and exchange of assets. Additionally, and perhaps most importantly, the currency peg makes future business planning significantly more predictable. These plans were probably the first indicators George Soros had access to and laid the foundations for the bet against the Thai Baht, described as an “attack” across multiple news platforms. Did he trigger the crisis intentionally or not, breaking the Bank of Thailand? Who knows? Freddie Raynolds thought it was relevant enough to conduct a thought experiment in applying what George Soros did. 

Regardless, a decade earlier, the Thai baht had been pegged to the US dollar. After the crisis, it was “depegged” and as of today, the Thai Baht remains unpegged. In October of 1997, the Thai Baht had depreciated to 60 cents on the dollar. Despite the devalued peg prior, during, and post, Thais were STILL encouraged by the Bank of Thailand [and others] to take on more and more loans. Ultimately, through the series of funnels that funds travel from the homeowner to the bank to wherever C-level management has decided, the loans were to be paid back in USD. 

#pegged #shortstick 

Sometimes, people just don’t pay attention to the news and make bad choices.

Georgia Regents University & Chulalongkorn University Share the Events

George Soros took out forward contracts to exchange Baht into dollars at the rate of 26 baht per dollar in January 1998. Soros advertised Thailand’s problems and sold all of his baht. Thailand defended the baht by buying up the surplus baht. When Thailand started to run out of dollars, the baht was floated on July 2, 1997. The Baht fell from 1$ for 25 baht in June 1997 to 1$ for 54 baht in January 1998. Soros traded 1 billion dollars for 54 billion baht on the spot market; he then used his forward contracts to change the 54 billion baht into 2 billion dollars – doubling his money.

Jonathan E. Leightner 
Levels of Relevant Monetary Exchanges for the Reader
  • (1) Personal Loans (person to person meetings to fruition), 
  • (2) Corporate and Banking Tier, real estate, financing, startups, and growth projects/incentives
  • (3) Foreign Exchange (FOREX). #wearebettingoncountries #letsgo

Back to the Present

TerraUSD and Terra (Luna) CEO and co-founder, Do Kwon, a Korean American Stanford Alumni, cackles maniacally in delight, on May 12, 2022: 

Do Kwon : “95% are going to die [companies], but there’s also entertainment in watching companies die.” 

Alex Botez: (mutters) “There’s entertainment in….wow, that’s so evil. Well, at least you get to learn something from it.” 

The number of total cryptocurrencies goes from 4,000 to over 10,000 since early 2021. Wary investors liquidate their funds with the ease and agility of a ninja, never before done in human history at this speed. Watch your platforms, my fellow investors. Look for loopholes that can be exploited, as awareness of these will protect you and your over-arching decision-making parameters as you invest. Choose wisely, for all hell can break loose. For those with the dream of financial independence, and hope to retire early (FIRE), in other words, gain the freedom to do what they wish with their time without the limitation of monetary “fuel”, your dream can become a nightmare if someone wants to break the system for personal gain. 

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