The great Luna-Terra crash: 5 lessons to be learned (2024)

For those of you not familiar with the entire LUNA fiasco, here is a quick roundup of what went down. There are these tokens in the crypto ecosystem known as stablecoins. Stablecoins are supposed to be priced equal to the US Dollar or another fiat entity and exist primarily so that crypto investors can get in and out of the fiat easily with no third party (in this case, a bank) to approve these transactions. There are multiple stablecoins in the market, such as Tether (USDT), USD Coin (USDC), and Binance USD (BUSD) to name a few. Three of the mentioned stablecoins are pegged to USD issued by the central bank. These entities own a treasury of dollars as cash reserves or commercial papers/receivables that back each coin to $1.

Between May 5 and May 13, UST lost its peg to the dollar, and more LUNA tokens were being issued. The supply of LUNA went from 725 million tokens to 7 trillion tokens in a week.

In this week’s column, we speak to Srivar Harlalka, co-founder, Flippy to discuss learnings from this crash.

Black swan events can happen anytime

The entire event that unfolded from the time UST lost its peg took place in less than 48 hours, within which LUNA went from $100 to less than a dollar.

In this week’s column, we speak to Srivar Harlalka, co-founder, flippy to discuss learnings from this crash. (Photo: flippy)

“What this teaches us is that the market factors such events in a matter of hours, and it quickly reflects in the price. If you are investing in cryptocurrencies as a trader, always remember to have the stop losses set, and keep liquidating your profits from time to time,” Harlalka told indianexpress.com.

Centralized exchanges might close trading during such events

If you believe you can easily cash out when such a crisis hits the market, think again because like in the past, the centralised exchanges are often forced to close the trading activity and even stop withdrawals from the exchanges till the market settles down. They often do this to prevent the market from crashing further and to prevent multiple pending sell orders from slowing down their platforms.

Not all stablecoins are stable

The Terra crash taught investors that not all stablecoins are stable. Interestingly, the team behind LUNA defied the single most important factor on which cryptocurrencies derive a value: decentralisation.

Harlalka said that while a few operators controlled this project, this was not visible to an average investor. “Do Kwon, the founder of LUNA and their team, sold their $1.5 billion worth of Bitcoin reserves to save the UST from crashing. A six-member team did so without involving the community in any way.”

The team went offline for a week, not responding to investors who were looking for multiple answers, only for them to later announce that the 80,000 BTC held by the foundation had been sold. Many crypto enthusiasts knew that the LFG was, in reality, not decentralised, but the common investor was forced to believe otherwise.

Do your research

The crypto market is often driven by FUD and FOMO, with a lot of hype and loyalty from investors. However, the wise thing to do is to research the underlying value of the token and only then invest. This fall also showed us how big and extensive projects can fail too.

“If we look at the data since 2013, except for Bitcoin, Ripple and Litecoin, none of the other tokens in the then top 15 tokens by market capitalisation exists in the corresponding list today. This again highlights the volatility in the crypto market and shows how even if certain projects are doing well today, they might not continue to do so forever, “he noted.

He also points out that fundamental flaws of protocols can cause crashes as large investors can manipulate the price of crypto projects. “However, the markets have been maturing with time, and the total capitalisation has also been increasing, which brings in greater stability today than how it was a decade ago.”

The Luna 2.0 fiasco

The Terra network was suggested to undergo a hard fork with the launch of Terra 2.0, and the previous Luna tokens were to be renamed Luna Classic (LUNC), according to the new plan offered by Kwon. With a 65.5 per cent majority vote, the community approved Kwon’s fork proposal.

Kwon’s snapshot for Terra 2.0 detailed how the chain upgrade would function and mentioned that they will create the new version of Terra without the algorithmic stable coin. The new Terra had no UST burning and minting mechanism and on 28 May, the new blockchain went live.

Previous holders of Luna and UST were promised to get tokens on this new Blockchain via an airdrop. To discourage investors from selling all of their Luna tokens at once, investors who owned over 10,000 tokens would receive only 30 per cent of their tokens at once, with the remaining 70 per cent dispersed over two years. Those with more than a million tokens would have to wait a year for their tokens, which will be subject to a four-year vesting period. Binance stated it was “working closely with the Terra team” to provide the “best possible service” to Binance users affected by the crash.

However, on multiple Reddit forums, investors mentioned the airdrop did not materialise, with the developer team finally issuing a statement, accepting the botched airdrop. The cryptocurrency was trading at $19.53 at its peak and then crashed to $3.99 within hours of its launch based on market data from CoinMarketCap.

“The shoddy and haphazard launch, lack of validation regarding the new pivot and losing faith in the team fuelled Luna losing its steam right after the launch. The loss of goodwill was further exacerbated when the internal legal team within Terra resigned on the 18th of May during the crash of what is now Luna Classic,” he added.