The Collapse of Terra Classic Network Resulting in a $40 Billion Loss

Summary

The Terra Classic Network, worth $40 billion, collapsed due to a mix of market factors and significant events. The network hinged on its two primary coins, $LUNC and $USTC. $USTC, an algorithmic Stablecoin, was designed to hold a steady value of $1. $LUNC was created to soak up $USTC’s instability through minting and burning processes and built-in opportunities for arbitrage. Trouble began when the Luna Foundation Guard withdrew a large portion of $USTC from Curve3pool to make room for the new Curve4pool. This caused a bank run. As a result, several large investors also pulled out significant sums from the anchor protocol, which made $USTC lose value on trading platforms. This triggered an uncontrolled production of $LUNC tokens and a quick drop in its value. The network was then overwhelmed by transactions due to market panic, which led to mass liquidations of collateral in the Anchor protocol. Eventually, Terra Classic’s CEO, Do Kwon, was arrested on various fraud charges.

Attackers

The following whale addresses, although not traditional attackers, played a key role in causing the crisis:

Losses

The Terra Classic Network incurred a loss of $40 billion, primarily due to the massive devaluation of $USTC and $LUNC.

Timeline:

May 7, 2023: An 85 million UST swap for 84.5 million USDC was detected, signifying potential capital flight from UST. UST’s value drops to $0.985 after large dumps on Terra’s Anchor and Curve. Source
May 8, 2023: Luna Foundation Guard commits to loaning $750 million of BTC to market makers to defend the peg of UST, and another $750 million of UST to buy back BTC after volatility subsides.
May 9, 2023: Deposits on the Anchor protocol fell below $9 billion from $14 billion as UST struggles to recover. ANC token fell 35%. UST loses its $1 peg again, falling as low as 35 cents. Source
May 11, 2023: Do Kwon is revealed as a co-founder of the failed stablecoin Basis Cash
May 12, 2023: LUNA price falls 96% in a day, going below 10 cents. The Terra blockchain is halted for the first time at block height 7603700 due to sharp price drop.
May 13, 2023: Trading of Terra tokens ends on Binance after UST loses its dollar peg and LUNA slumps by more than 99%. Binance later resumes trading.
May 25, 2023: Terra validators vote to approve Do Kwon’s plan to launch “Terra 2.0” without a stablecoin. Previous LUNA and UST holders will receive the new blockchain’s native token, LUNA, based on their holdings. The old Terra blockchain will continue to operate under the name “Terra Classic.” Source
May 27, 2023: Blockchain data analytics firm Nansen releases a report on the UST’s collapse, debunking the theory of a single attacker causing the depeg. Source
March 23, 2023: Do Kwon, the CEO of Terraform Labs, was arrested in Montenegro.
May 28, 2023: Terra 2.0 launches, with a LUNA airdrop planned to follow.

Security Failure Causes

Poor Choices: The Luna Foundation Guard’s decision to withdraw 250 million $USTC from Curve3pool contributed to the crisis.

Actions of Large Investors: The crisis was also caused by large investors taking out a lot of money from the Anchor Protocol. This upset the balance of $USTC and other stablecoins in the pool, led to a quick sale of $USTC, and caused too many $LUNC coins to be made. The network couldn’t handle all this, and the inability to predict and manage these risks caused the Terra Classic Network to collapse.