The cryptocurrency market is in the middle of a widespread crash, causing investors serious financial pain with no clear way out.
The most dramatic fall yet has been the collapse of the $30 billion Terra ecosystem: its token Luna, its algorithmic stablecoin TerraUSD (UST)—which is supposed to remain pegged 1:1 to the dollar—and associated lending protocol Anchor. The implosion has caused an unimaginable amount of pain for would-be investors and has exacerbated an ongoing sell-off across crypto markets more generally. UST is currently trading at $0.15, and Luna has fallen from over $100 in April to $0.0001 today, effectively “going to zero,” in crypto-speak. Luna’s most dramatic fall has happened in the last week, with the token falling 99.99 percent from its $80 price a week ago. The price of Anchor’s token also fell dramatically, from $2 to $0.09.
The founder of the South Korea-based firm behind Terra-Luna, Terraform Labs, is Do Kwon, a normally prodigiously loud Twitter poster who regularly dismissed critics as “poor” in replies and said in one interview that “95 percent [of coins] are going to die, but there's also entertainment in watching companies die too.” Now, he hasn’t posted on Twitter in days and seems to have requested emergency personal protection from police.
Terra isn’t just another random crypto project: It was propped up by venture capitalists who pumped $150 million into the ecosystem last year, potentially giving investors confidence in the project. Investors included major players such as Pantera Capital, Arrington Capital, Coinbase Ventures, and Galaxy Digital.
Now, amid the collapse, most people have found themselves drowning in a bloodbath, with some investors saying they have lost their life savings, taking to online forums to share their despair or suicidal ideation.
Motherboard spoke to several investors in Terra-Luna, some of whom describe financial pain and a loss of faith in a project they once believed in without realizing its true nature. Motherboard could not independently verify their losses.
“To be a trader is important to keep the mind still and act ‘robotically’ but on the last two days I've let my emotions flow and have tried to accept them and let them be,” one trader from Colombia who lost their savings told Motherboard. “As you read in my text, the frustration and guilt are unbearable. I've had several big drawdowns before, that's part of it, but this time I'm zero, nothing.”
“I'm not rich. I had 27 Luna. I lost a few thousand dollars. I’m disabled on a fixed income of $197 a month. So this hurts me,” said one investor in a Twitter DM. “I want to help expose the story of Terra and the INFUENCERS who helped promote this Ponzi.”
“I have degree in TV radio broadcasting,” they added. “Lol u need a tech guy. I would love to intern."
According to the investor, they were “a big believer in Terra” before the crash.
Another Redditor told Motherboard he’d lost $10,000, but after auditing his finances he realized it was actually over $20,000. “I lost my entire savings,” they said. “Over $20k, it became around $50k, because of the exponential growth of Luna.”
Another investor who posted that they lost $20,000 in the Terra-Luna said they now acknowledge the project’s “Ponzinomics” and warned risk-takers away from seeking huge gains on the now-cratered price of Luna.
“So I invest across multiple ecosystems and the main reason I liked Terra was that it paid staking rewards in a stablecoin. Truth be told, I should of done more research and realised it was Ponzinomics,” they said.
“The main reason I told people not to buy is that they think the risk reward is great because the price is so low. I had one guy message me thinking he was gonna retire if the price came back. It’s simply not possible Luna is now a dead project that is unsaveable.”
“$LUNA is by far the only investment I've ever made that has lost 99 percent in less than 24 hours,” another investor tweeted. “I've never lost money so quickly before.”
“I only lost a small amount on $LUNA because I believe there is a high risk of further decline,” they told Motherboard in a tweet exchange. “I would not advise anyone to invest large sums in $LUNA. If they want to take the risk like I did, I recommend they spend a small amount of money on it.”
How did this all happen? UST is what’s known as an “algorithmic stablecoin,” a relatively recent invention in cryptocurrency that seeks to leverage financial incentives to generate a stable $1 peg, rather than holding actual U.S. dollars and other assets in 1:1 reserves. The scheme was essentially that 1 UST could always be destroyed to mint $1 worth of Luna, and Luna (whatever its price is) can always be destroyed to mint an equivalent amount in UST. This delicate balance of supply-and-demand worked for a while, but has now resulted in a “death spiral” as UST exits to Luna and balloons the circulating supply into the billions, cratering its price completely.
Another part of the equation is Anchor, a Terra-based lending protocol that incentivizes users to “stake” their UST for a reward of nearly 20 percent interest. All these pieces came together on Saturday when Anchor’s total deposits fell from $14 billion to $11.2 billion, and sparked panicky sell-offs of UST.
Terra founder Do Kwon was undisturbed by this at the time and posted a strange poem to assure fellow "LUNAtics" that all was well:
Tragically, many people saw this exact situation coming. For years, high-profile Bitcoiners have warned about the dangers of fragile so-called algorithmic stablecoins. In January, we got a taste of all this: DeFi protocol Abracadabra began to unwind its substantial Anchor position and not only temporarily depegged UST but crashed Luna. One Reddit user in late January even anticipated a doomsday scenario where lost confidence in Anchor could lead to deposits dropping, that UST being converted into Luna and massively expanding the supply, and massive downward pressure killing both cryptocurrencies. This, they reasoned, would spell doom for the ecosystem as a depeg would quickly be followed by a death spiral.
After January’s scare, Terraform Labs created the Luna Foundation Guard, which would sit on a reserve of Bitcoin ($3.5 billion worth) that could be deployed to help stabilize UST if it depegged again. And sure enough, when it depegged over the weekend, LFG announced it would lend $1.5 billion worth of Bitcoin and UST to re-peg the stablecoin.
While UST did climb back to $1 in value, it did not restore confidence in the ecosystem and investors began to flee. Anchor's deposits plunged to $8.7 billion, the platform’s token fell 35 percent, and soon enough UST cratered and Luna collapsed even further, from north of $100 to $1 to a fraction of a fraction of a fraction of a penny.
Many commentators, such as crypto critic David Gerard and American University law professor Hilary J. Allen, have pointed out that this all resembles the 2008 financial crisis. The Federal Reserve and the Treasury Secretary have also gone to great lengths to establish worrying parallels between stablecoins and the kinds of money market funds that deepened the severity of the 2008 financial crisis.
For the most part, it seems unlikely that much of anything will be done for those wiped out because of the collapse of the third-largest stablecoin. So far, all talk of bailouts has largely been limited to just that: talk.
The Block’s Vice President of Research, Larry Cermak, tweeted of “a rumor spreading about Jump, Alameda, etc. providing another $2B to ‘bail out’ UST,” but that has so far failed to materialize. Bloomberg reported that the backers were having trouble finding funding for a bailout, even after offering investors Luna tokens at a steep discount.
"It's a shame about Luna but the reality of that project is they were not as innovative as everyone said and at the end of the day people heard 20 percent yield and stable coin and people went in big," one Redditor who only put $100 into the project told Motherboard. “But investing in crypto is the best opportunity I've come across in my 35 years. I expect to probably be in the red at some point, which is fine. I'll keep buying Bitcoin at least and I'll keep my eye out for new projects and new Ponzis.”
Other burned investors Motherboard spoke to are looking forward as well.
“Of course, I think for most people that aren't the top 0.1 percent, that's a big hit,” said the investor who lost $20,000. “However, life goes on and there will be a chance to accumulate more and next time ensure I take profits along the way. You can never look back, only forward at what your next steps are.”
Regardless, enthusiasts who were told that UST and Luna were the future are in the hole. Trading of the coins has been halted on multiple exchanges, meaning what little some had left is likely inaccessible for the foreseeable future.
DeFi—and crypto generally—is littered with the graves of projects that have crashed and burned. Kwon himself was just revealed by Coindesk to have run a failed algorithmic stablecoin before kicking off UST known as Basis Cash. Its total value briefly peaked at $174 million in February 2021, while Terra's sat at $30 billion before its spectacular demise.
Regular people caught up in Terra-Luna are unlikely to see a bailout. Instead, things will move on as they always have: The backers and financiers will do what they can, while the regular people who invested will suffer what they must and scrabble for some kind of fix.
“I had one guy message me thinking he was gonna retire if the price came back. It’s simply not possible Luna is now a dead project that is unsaveable," one Redditor who claims to have lost $20,000 investing in the Terra ecosystem told Motherboard.
On Friday afternoon, Kwon broke his silence and posted to the Terra forum a short proposal that essentially leaves it up to the community of developers and investors to wind back the blockchain clock and rescue the Terra ecosystem. The post admits that the project is all but dead.
“Even if the peg were to eventually restore after the last marginal buyers and sellers have capitulated, the holders of Luna have so severely been liquidated and diluted that we will lack the ecosystem to build back up from the ashes,” Kwon writes. “While a decentralized economy does need decentralized money, UST has lost too much trust with its users to play the role.”
Kwon’s post pitches a plan to "reconstitute the chain to preserve the community and the developer ecosystem" that resets Luna's token supply from 6.5 trillion tokens to 1 billion tokens and distributes it amongst Luna holders, UST holders, and the community holders. It's not really clear how any of this would actually happen.
Kwon hopes "the community can achieve speedy consensus on how to revive the Terra ecosystem,” he wrote. “I'll always be here."
Jordan Pearson contributed reporting to this story.