The crash of TerraUSD (UST), a stablecoin pegged to the US dollar, and its sister currency LUNA, bankrupted many investors, losing nearly all its value in recent weeks. The Terra network and its leader, Do Kwon, rose to blistering fame in the crypto world thanks to big-shot investors, only to fall apart within a few days in May 2022. Their meltdowns had a domino effect on the rest of the cryptocurrency market, tanking the price of Bitcoin and accelerating the loss of $300 billion in value across the crypto economy.
We present a record of Terra’s journey (so far) — highlighting the meteoric rise and the collapse of the $60 billion crypto empire — touted by experts as one of the ‘biggest failures in the crypto world’.
The birth of Terra
In January 2018, Do Kwon, a South Korean developer and computer science graduate from Stanford University, US, and Daniel Shin, an e-commerce expert and investor, launched the Terra network with plans to develop Chai, an e-commerce payments application, and to create a price-stable cryptocurrency against the government-issued fiat currencies to facilitate transactions.
The duo co-founded Terraform Labs in Seoul, South Korea, the firm that develops the Terra blockchain, and was incorporated in Singapore in April 2018. It got widespread support by the Terra Alliance, a group of 15 investment banks operating in 40 countries around the world, even though Cyrus Younessi, head of risk at MakerDAO, a crypto lending credit facility, and a former research analyst at Scaler, was the first to tweet that Terra/LUNA would not work.
The token was first made accessible to investors in a private token sale in August 2018, raising a huge $32 million from investors including Binance, OKEx, and Huobi.
The meteoric rise
On January 30, 2019, Terraform labs charged 18 cents per token during a seed round, and 80 cents per token during a private sale. The following month, a South Korean crypto exchange launches the first LUNA staking product and LUNA started selling globally via an initial coin offering to investors.
In April that year, Do Kwon already became a public figure and several co-authors published the Terra Money white paper. Terraform Labs raised more than $200 million from investment firms such as Arrington Capital, Coinbase Ventures, Galaxy Digital and Lightspeed Venture Partners.
Nicholas Platt, the head of research at Terra, introduces the Anchor protocol, a platform built on Terra that lets investors earn a high yield on their deposits and also borrow against their crypto holdings.
In September 2020, UST, the Terra blockchain’s stablecoin, was publicly announced, with plans to launch on Ethereum and Solana. In December, Terra’s synthetic stock protocol, Mirror, launched.
The going was good so far. In September 2021, the US Securities and Exchange Commission subpoenas Terraform Labs founder Do Kwon with concerns that Mirror Protocol may violate federal securities law, which designed and offered financial derivatives that virtually “mirrored” its actual listed stocks. Kwon responded by stating that he wouldn’t comply with the demands, and instead would be suing the SEC.
In November that year, a viral thread on crypto Twitter floated a theory of an attacker taking TerraUSD down like George Soros, the man who broke the Bank of England, tanked the pound in 1992. Do Kwon rules out the possibility of a George Soros-style attack on UST/LUNA that could send it into a death spiral. Some would later, in mid-2022, claim this is the type of scenario that actually spurred Terra’s demise.
Despite the odds, Luna witnessed an uptick, as its price nearly doubled to record highs above $90, and was up 58% in December 2021.
2022 — The steep rise and collapse
In January 2022, the Luna Foundation Guard (LFG) was established as a non-profit based in Singapore, with Do Kwon serving as its director. Terraform Labs allocated a portion of the money obtained from UST sales to Luna Foundation Guard, to be used as reserves to stabilise the price of UST. As of 7 May, just before UST broke its peg, LFG held reserves of 80,394 bitcoin worth approximately $2.4 billion. Bitcoin was the largest portion of the reserve assets, though LFG also held reserves in various other stablecoins and cryptocurrencies.
In February 2022, Terra and the Washington Nationals Major League Baseball team announced they had entered into a sponsorship agreement which provided stadium and television branding, as well as the rebranding of the Washington Nationals club and lounge to the “Terra Club”. The deal was originally proposed to the Terra community by Kwon, referring only to an unnamed “sports franchise in one of the four major American professional sports leagues”, and the community agreed to pay $38.15 million for a five-year-long exclusive partnership.
It was further revealed in April this year that Terraform Labs, incorporated in Singapore also did not submit an application for a licence under the Payment Services Act according to a report in The Straits Times, a leading newspaper in Singapore. It is also not a notified entity, meaning it has not been granted temporary exemption from holding a licence by the Monetary Authority of Singapore.
According to documents filed by Kwon at the Supreme Court of Korea’s Registry Office, Kwon filed to dissolve the company’s Korean entity on 30 April 2022, and was granted approval on 4 May 2022.
Despite Kwon’s attempts to dispute and avoid investigations from the SEC, a US Court hearing in Manhattan in February 2022 ruled in favour of the SEC’s right to continue its investigation into Kwon and Terraform Labs.
Beginning on 9 May 2022, the tokens made headlines after UST began to break its peg to the dollar. Over the next week, the price of UST plunged to 10 cents, while Luna fell to “virtually zero”, down from an all-time high of $119.51. The collapse wiped out almost $45 billions of market capitalisation over the course of a week.
On 13 May, Terraform Labs temporarily halted the Terra blockchain in response to the falling prices of UST and Luna. Many countries exchanges, including Indian crypto exchanges such as WazirX and CoinDCX delisted the beleaguered token after nearly 100% fall in the digital asset in just under seven days.
On 16 May 2022, blockchain analysts claimed that the usage of the bitcoin reserves of LFG still remains largely uncertain. “Likely causes of the collapse included mass withdrawals from the Anchor Protocol days before the collapse, investor concerns about cryptocurrencies more generally, and a drop in the price of bitcoin,” they mentioned.
During the collapse, holders converted Terra into Luna via the mint-and-burn system (sent to an inaccessible address, as it is removed from circulation), which caused the price of Luna to collapse due to its increased supply. This in turn destabilised the balancing mechanism between the currencies.
On 18 May, the newly appointed Korean Minister of Justice, Han Dong-Hoon, extended the “criminal investigation” to the Seoul Southern District Prosecutor’s Office, vowing “to track illegal funds and capital transfers, crack down on tax evasion, audit company finances and seize the proceeds of criminal financial activity, according to multiple news sources. On its first day of operation, the Financial and Securities Crimes Joint Investigation Team reportedly singled out the Luna and Terra crisis as its first investigation target.
On 23 May, some sites have reported that Terra Luna witnessed a 100% pump over the weekend. A possible reason why the token pumped, could be that Duo Kwon had proposed that the Terra network be hard forked, and the Terra Luna token be transferred to the new chain, as a revival plan last week. This proposal was received positively by the community with over 80% in favour of the ‘Hard fork.’