Terra LUNA: What went wrong with LUNA?
Before diving in, let’s keep in mind this basic fact that 1 UST needs to be equal to 1 USD in order to keep LUNA stable. Another fact to keep in mind is that if people stop buying or selling UST or LUNA then it becomes a problem. This can happen when a large part of the LUNA network gets controlled & there is bulk flushing of the coins.
Experts are proposing two possible reasons why this might have happened.
The first reason can also be called a conspiracy theory which claims that the famous asset management company BlackRock & Citadel borrowed 100,000 Bitcoins from Gemini exchange & swapped 25,000 of them into UST. Then they called Do Kwon (founder of Terra Foundation) telling him that they want to sell a lot of BTC for UST. Kwon agreed & gave them a huge amount of UST, strongly lowering UST’s liquidity. Then BlackRock & Citadel bulk sold all the BTC & UST lowering the price of 1 UST equal to 0.68 USD on 09.05.2022 & further triggering the crash.
Another explanation revolves around the earlier identified potential Achilles heel of the system: the Anchor lending protocol, which offers an extremely high 20% yield (APY) on deposits. It is argued that users were flocking in rather for the unsustainable (?) yields than the actual stability of the coin. This would make Anchor a ticking time bomb until the yields and money would dry up and with it UST's willing holders. UST deposits dropped from $14B to $3B signaling a drop in confidence causing major selling pressure. When there was no longer $1 worth of LUNA for every $1 of UST, some traders feared the entire system might become insolvent. A lot of reasons to further leave/short the coin.¹
Let us know which of the two reasons sounds more plausible to you?