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LUNA cryptocurrency wipeout and UST Stablecoin Depegs in less than 3 days

In less than 3 days, the UST Stablecoin and LUNA cryptocurrency went from over $50 Billion to less than 0.  This was the 3rd largest stablecoin.

https://www.coingecko.com/en/coins/terra-luna ~$30 Billion

luna market cap chart

https://www.coingecko.com/en/coins/terra-usd ~$20 Billion


UST market cap chart

Was it an Cyber-Attack? Hack? Ponzi?

  • Cyber Attack? No indication of this, Actually from everything said so far the blockchain behaved as it should have with no network outages from cyber-attack (This actually shows that the technology used to implement is now battle tested - It is/was a Cosmos IBC (Inter-Block-chain Communication protocol)
  • Hack? No indication of this.  No keys were stolen.
  • Ponzi? Not exactly, it wasn't promising any type of yield and paying off older investors with new investors.  Although Anchor Protocol (https://www.anchorprotocol.com/) it is a bit more grey (this was the protocol promising 20% yield on UST)
  • What happened? Most opinion is that it was a currency attack where more than $3 Billion of UST was used to force the treasury to defend the peg when the treasury didn't have enough collateral (causing a viscous cycle of selling LUNA to try and defend the peg, but being below $1 caused a feedback loop upon itself).  Who caused this and why? well time will tell to unfold the mystery, but meanwhile many investors lost their shirts.  This definitely hurt a lot of people and the long term affect will probably mean tighter regulation for the industry.  This is also the first time that we've seen a major blockchain just voluntarily halt.

Take away lessons: 

  • Protocols/Investments will be attacked given enough incentive 

  • Know what you are investing in.  Even though this was considered a "Stablecoin".  It is important to understand how the peg is maintained.  In this case, it was believed that there would be enough liquidity to meet any demand managed by an algorithm.   

  • To stay up to date in this development, I believe the team is updating via twitter: https://twitter.com/terra_money    

  • Broader take away: Risk Management, especially in crypto because it is so fast you have to be prepared for wild swings.    

    • Best way is be very mindful of how much exposure you have and realize the more speculative the asset the higher chance it can go to zero.
    • The other way is to use options or derivatives to control risk, but since this is such a nascent product, I don't think there were any viable options.  Currently it looks like Bitcoin and maybe Ethereum have liquid enough options to do any type of strategic risk management.
    • Do you add or dump?  I guess the question really should be from this point forward do you still believe in the asset.  And if so, then for the amount you have, is the risk too high? or do you want to increase your exposure?
    • One rule of thumb is to not let any individual position be more than 2-5% of your portfolio.  With crypto being about 3 to 5 times more volatile, people may want to consider less like 0.5% to 1%
    • This definitely makes me want to re-assess how much exposure is appropriate for crypto for myself

     

 

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