The Terra LUNA CRASH was inevitable. Here’s why.

A lot of people including me actually saw this coming. It doesn’t take a genius to figure it out.

RODO

Published in

Coinmonks

5 min readMay 13, 2022

Coordinated attacks? A bubble? A Ponzi scheme? What happened with LUNA and the entire Terra Ecosystem?

The $LUNA crash. The cryptocurrency fell almost 100% in a couple of days.

Many stories, many different explanations. Truth is, this was predictable, and crypto developers just keep ignoring basic economic rules.

Let me prove to you exactly how predictable this was by showing you this tweet I sent out on April 19th, 2022.

My prediction for a “Doomsday” for $LUNA, calling for a 90% decline. It surpassed even my most outlandish target.

Here’s the link to that tweet if you don’t believe me: https://twitter.com/yrodos/status/1516571415272689678?s=20&t=EWObSdTdBgtoUXQfzp2nJg

In this specific case, I used an advanced form of Elliott Wave technical analysis called “Harmonic” Elliott Wave, but I’m not going to get into that because, truth is, you really didn’t need any fancy TA skills to know this was eventually going to happen.

Disclaimer: If you really do want to get into that, you can go check my linktree in my Twitter bio, there’s plenty of free educational resources there: @yrodos plus I recommend reading my previous article “Markets Aren’t Random”.

Before we start, let’s get into how this entire Ecosystem worked.

How do stablecoins stay… stable?

The main goal behind LUNA’s existence was to create the first ever completely decentralized stablecoin, the “UST”.

You see, most other stablecoins like USDT and USDC are managed by centralized institutions that back or supposedly back the entire circulating supply of said stablecoin with real US dollars.

This means that, for each USDC, there is one physical USD locked somewhere to back it up.

If you buy a USDC to this institution, the USD that you used to buy it will be stored.
If you sell a USDC to this institution, you’ll recieve your USD back and the USDC will be destroyed or “burned”.

This is the method by which these institutions can mantain this “peg” to the US dollar and keep their coin’s price stable and fixed at exactly $1, each of these coins is just a representation of a physical US dollar.

The LUNA — UST peg

In the case of LUNA, developers had the brilliant idea of creating a “stablecoin” pegged to it, the UST. The problem is, if you peg an asset that’s supposed to be stable to an unstable one, where’s the stability supposed to come from? Exactly, nowhere.

How the Algorithm Worked

To keep the UST fixed at a price of $1, the algorithm was charged with arbitrarily minting (creating) or burning (destroying) LUNA & UST tokens.

Basically, every time someone burned $100 worth of LUNA, 100 UST would be minted. And every time someone burned 100 UST, $100 UST worth of LUNA would be minted.

I hope by now you’re already seeing the problem.

The Deflationary Crash Scenario

First problem: Not Bank Run-Proof

In a financial market, crashes are inevitable. Prices inflate and deflate all day long, and herds go from euphoria to panic and back all the time, that’s just how prices move (I recommend reading my previous article “Everything you know about Market Behavior is Wrong”).

If your system isn’t designed to handle the consecuences of panic, that is, a Bank Run where everyone wants to withdrawal or sell their assets from the system, then a collapse of said system is inevitable and imminent because an eventual fall in the demand is inevitable.

In Terra’s case, that means a UST depeg.

That’s exactly what happened.

This is because the UST wasn’t really backed by the entire LUNA marketcap, it was actually backed by LUNA’s trading liquidity. Actual traders can only provide so much exit liquidity at any hour of the day before it runs out, and if people still want to sell because of panic, they’re going to keep selling at a lower price if it’s necessary to exit. Depeg.

Second Problem: Infinite Demand Needed

As we’ve seen, when you burn a UST, you also mint the equivalent in LUNA. This means that as people were panic exiting from UST to other stablecoins, a lot of LUNA was being created out of thin air.

Inflation. LUNA depreciates.

Also remember that all the buying pressure was already being absorbed by all the people selling UST in panic, so with no buying pressure left and the supply surplus of LUNA being created with no demand to absorb it, this created a vicious cycle that led to more panic and eventually a death spiral.

To keep a system like this from ever collapsing, you would need to have an evergrowing stable demand. This is by definition impossible.

Third Problem: Speed of the Algorithm

Even if you somehow had all the liquidity in the world available to back the totality of people exiting your stablecoin (as 20% of UST was backed by Bitcoin reserves), you would need an extremely efficient algorithm, fast enough to perform arbitrage with billions of dollars being market sold at a moment’s notice.

This isn’t just difficult, it’s impossible to achieve 100% efficacy in this system, meaning that it would be impossible to keep the stablecoin from at least momentarily depegging when demand for the coin suddenly drops.

Fourth Problem: False Demand created by Anchor Protocol

The promises of stable 20% annual percentage yields obviously brought a lot of demand into the Ecosystem. This is precisely what kept LUNA from crashing too early- inflated demand of UST by Anchor Protocol.

And what happens when people demand so much UST? Well, LUNA is burned.

This creates a coin exploding in value in a very short amount of time with not a lot of demand, but an artificially decreasing short supply. No one demanded LUNA’s except for speculation, they just wanted the UST’s to stake them in Anchor.

Boom & Bust

In short to end this: Terra’s developers knowingly or not created the perfect bubble. One made to quickly climb exponentially catching eyebrows, trap everybody in, and then suddenly explode out of nowhere.

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