How $45 Billion was Wiped out in the Crypto World over a week.

This is a story of a legacy, a collapse, that wiped out $45 billion of market capitalisation over the course of a week.

• Prelude - Do Kwan:

Do Kwan was a cryptocurrency developer who founded the Terra Luna token.

Let me get this straight, he was a very difficult person, who had a lot of attitude and was always down looking on those who didn't believe in his tokens and cryptos.

Attached are a few of his responses in twitter.

 

                                             

• Chapter 1: Learning about different Coins:

Before we start, this article is about a crypto currencies. I will try to water this down for you. If you have queries, do let me know in the comments. This article will be like an interaction. We will do it like a conversation.

• Before we start, Well What is a stable coin Pranavh?

Well my friend, consider a Fiat Currency, A stable coin is just like a Fiat Cryptocurrency, The only difference is that it is not volatile. Why isn't it volatile? Well a Stable coin is backed by a fiat currency. Technically it's called Pegging. They hold up their value by way of this pegging.

There are two main stable coins, Tether and UST are common ones.

• The pegging works in kind of three different ways,

1. Maintain cash or cash-equivalent assets whose value should match the total value of the stable coin.

2.Maintain a reserve of cryptocurrencies in place of fiat money, but overcollateralize, hold reserves more than the face value of their stable coins to compensate for their volatility.

3. Here Luna Terra-UST took a different approach, called to operate like an Seigniorage stable coin.   Seigniorage also pair the stable coin with other cryptocurrencies to have more control over its valuation. Along with a mint and burn mechanism, the protocol also offers incentives to market participants to buy/sell the paired cryptocurrencies to maintain the price of the stable coin.

• The Working of the Peg:

The LUNA-UST pair works in a straightforward manner. Users can exchange 1 UST for $1 of Luna and the vice versa. If a $1 of LUNA is swapped for 1 UST, LUNA is burned, and UST is minted. It's the other way around when 1 UST is swapped for $1 of LUNA. This works fine when UST's valuation is stable and in line with the US Dollar.

                                   

One UST could be exchanged for a floating quantity of Luna with a market value of $1. If they are exchanged, the token is taken out of the circulation by the smart contracts programmed to maintain the balance in the system.

What does happen when 1 UST is Greater than 1$?

In a word- Arbitrage.

What is an arbitrage in this situation?

There is a positive to trade $1 worth of Luna for one UST, which is valued more than one dollar, Thus ,making super quick profits. This puts more UST into circulation, driving down the price of UST.

Vice versa, when the market value of one UST is less than $1 there is an incentive to trade one UST, which now is worth less than $1, for $1 worth of Luna, making an instant profit. This takes some UST out of circulation, driving up the price of UST.

• De-Peg defacto:

On May 7th, A De-peg was catalysed by the withdrawal of $150M UST from by Terraform labs to prepare for the new launch. This was followed by a large $350M sale of UST for USDC. This caused significant imbalance between the UST and Terra in the pool. This lead to the users rushing to pull out their funds and swap out of UST. This Effect in Theory is called as a death spiral.

The Luna foundation had initiated nearly $1.5B of capital from its reserves in an effort to add liquidity to the ecosystem and protect the peg. The foundation also tried to raise an emergency $1 billion reserve.  The Foundation was unable to maintain the peg and the deployment of BTC caused further sell-pressure, with the broader crypto market dropping in sync with UST.

                          

                                   

Number 1 Causes, number 2  which causes Number 3, and Number 3 causes 1. This is a vicious circle.

As a result LUNA dropped from $87 on May 5 to $0.00018 On May 17. As an effect of this.

Many people in the crypto world believe that this is a Direct attack on Do Kwan which had been initiated by various hedge funds. But, no proof of that has been found.

Many state that this is a response for his over the top attitude.

Everything aside, Times have changed. I do not have a personal comment on this.

• The Future

Since Luna crashed,

Do Kwan is Planning a Re-Boot. The terra block chain still has uses, which has lending and trading protocols.

They created a New version called Luna. The old Luna was renamed Luna Classic. It Began trading in late May around $19(at its debut), But, Later fell to $2.

Do Kwan started over again, as cryptos markets are unregulated. Funny thing is The followers of Do Kwan are Called Lunatics after the Luna Crypto currency. Those Lunatics still believe in the Blockchain.

Want more clarity, I am available at the comments section. Please do share this article more if you want this story to reach more people.