May 13, 2022
It always hurts me when the WSJ gets it wrong …
This article generalizes about Crypto while not understanding at all what happened with Terra USD and Luna which they use as an example. This was simply a bad currency peg that was attacked as all bad currency pegs are/should be and the results were/are algorithmically driven instead of having a human intervene.
If you want to read more about Currency Pegs, start here or here.
It took George Soros $10 billion of break the Bank of England and their currency which they were artificially trying to keep pegged to the stronger German Deutschemark. Soros made $1.5 billion in a month. The folks who led this attack on Luna and Terra deployed around $1.6 billion and it looks like they made just under $1 billion on their BTC short and I have no idea if they had a Luna short on at all. It looks like they covered their Terra UST position with a small loss.
This was an attack on the peg, by a sophisticated trader that saw the weakness, set up the trade over 3 months and knew that if they attacked Terra USD the Luna Foundation would need to liquidate its BTC crushing the BTC bid, this drove a massive drop in BTC and the BTC short covered. The Reddit boards are saying this was a Citadel trade and some people are pointing to wallets where they set up the short. I have no idea if any of that is true, but the short, the cover and then the crushing of Luna is real.
Luna issued more Luna automatically (as it was coded to do) to stabilize and the short broke that mechanism so Luna foundation had to liquidate to cover. “Terra seeks to set itself apart through its use of fiat-pegged stablecoins, stating that it combines the borderless benefits of cryptocurrencies with the day-to-day price stability of fiat currencies. It keeps its one-to-one peg through an algorithm that automatically adjusts stablecoin supply based on its demand. It does so by incentivizing LUNA holders to swap LUNA and stablecoins at profitable exchange rates, as needed, to either expand or contract the stablecoin supply to match demand.”
That quote is from coinmarketcap and the eye popping number is that the token supply of Luna grew from 700 million to just under 7 trillion as the algorithm printed away in vain new Luna tokens to support the peg when the attack had crushed one side of the bid/ask and the foundation was liquidating BTC as fast as it could to save the day, which it couldn’t.
A two way market just arb’ed a dumb structure out of the market. Soros forced the BOE to face reality around their own inflation. This is not about Crypto, this is about Luna.
These are my personal opinions/research but I make no reps/warranties as to accuracy, especially about Reddit.