As the world of Terra flipped upside down after enjoying its spot as one of the most favored cryptocurrencies by investors, the controversy behind it continues. It can be recalled that the price of major cryptocurrencies plummeted as a result of consecutive market crashes while the price of LUNA went into freefall following the depeg of its stablecoin UST. From an all-time high of more than $100 in April, the price of LUNA fell below a fraction of a penny. In the history of crypto, this kind of event may not be something new, particularly for tokens with a small market cap but not with crypto assets like LUNA which has a market cap of $40 billion at that time. 

 

On May 7, more than $2 billion of LUNA was taken out from Anchor protocol and hundreds of millions were immediately sold. With such a massive sale, the value of UST immediately depeg to only $0.91. Traders engaged in arbitrage swapping 1 UST valued at less than a dollar to $1 worth of LUNA. As the UST value declined between 30 cents to 50 cents, investors engaged in a massive sell-off of the stablecoin. The stablecoin’s market cap has fallen sharply from billions to only millions in just a few days. 

 

There were speculations that the downfall of LUNA and UST is a result of an attack carried out by culprits that exploited the vulnerability of its algorithmic stablecoin. Blackrock, Citadel Securities, and Gemini were the parties allegedly involved in the attack. But the parties strongly denied the accusation thrown at them. But another story came to light. In a report by Cnet, Cyrus Younessi, former head of risk management at MakerDAO four years ago has already expressed his concern over Terra’s model branding it as “broken”. 

 

“That’s literally in the original threat model that anyone in crypto builds: How would this hold up if a guy with $100 billion came in and tried to take this down?”

 

He further stated:

 

“Terra could have grown to be 10 times as large” before such a crash. Better that we prick that bubble of unsustainable protocols sooner than later.”

 

In an attempt to save what is left of Terra, Do Kwon, the blockchain’s founder proposed a fork but crypto leaders were strongly against the Terra founder’s revival plan. Binance CEO Changpeng Zhao expressed his opposition stating that it is not a viable solution to the ongoing crisis in his tweet on May 14.

 

“Personal opinion. NFA. 

 

This won’t work.

– forking does not give the new fork any value. That’s wishful thinking.

– one cannot void all transactions after an old snapshot, both on-chain and off-chain (exchanges).”

 

Dogecoin co-founder Billy Markus has also coined his thoughts about Do Kwon’s revival plan and even asked the Terra founder to leave the industry. In a report by Cointelegraph, he stated:

 

“If they wanna pay off the victims of their dumbass failed protocol, instead of using new money from new victims, they should use the money they already funneled from investors to pay them back.” 

 

In another tweet, CZ has expressed his personal disappointment over Do Known’s uncooperative stance. He also suggested that burning is a better alternative instead of the proposed fork.

 

“I am very disappointed with how this UST/LUNA incident was handled (or not handled) by the Terra team. We requested their team to restore the network, burn the extra minted LUNA, and recover the UST peg. So far, we have not gotten any positive response, or much response at all.”

 

Despite strong pushback from major crypto proponents and investors, Do Kwon’s proposal for a fork was implemented. Terra’s revival plan also known as “Proposal 1623” has received overwhelming support from Terra backers as announced on the project’s official Twitter. This marks the beginning of the new Terra without the UST stablecoin.

 

“With overwhelming support, the Terra ecosystem has voted to pass Proposal 1623, calling for the genesis of a new blockchain and the preservation of our community.”

 

With the implementation of the Terra fork, one billion LUNA was distributed as an airdrop to all LUNA holders. Holders of the old LUNA now known as LUNC (Terra Luna Classic) retain their tokens which remain tradeable to major exchanges including Binance. The old and new LUNA coexisted with the former now just a meme token. 

 

The Luna Foundation Guard 80,000 Bitcoin reserves valued at $2.2 billion at that time intended to protect UST’s peg have been depleted which added up to the controversy. Binance founder has also raised this concern in his tweet.

 

“Where is all the BTC that was supposed to be used as reserves?”

 

The answer has surprised everyone in the crypto industry. In a CNBC report on May 16, Elliptic, a blockchain analytic firm stated that 52,189 bitcoins were moved to the Gemini exchange and the remaining 28,205 bitcoins were transferred to Binance. Elliptic co-founder Tom Robinson commented on the matter in a report by Wall Street Journal. 

 

“We can see the movements on the blockchain, we can see the funds move to these large centralized services. We don’t know the motivations behind these transfers and whether they were transferring them to another actor or whether they were transferring the funds to their own accounts on these exchanges.” 

 

Luna Foundation Guard and Do Kwon have remained mum on the issue leaving investors clueless as to where and how the reserve funds were used. As further stated in the report, the foundation claims that it still had $106 million in assets which will be used to compensate the holders of Terra’s stablecoin. 

 

The revival plan which was primarily aimed at saving LUNA alone became the subject of a new debate. Will the remaining funds at LFG be enough to compensate all TerraUSD’s investors? No statement was issued yet on how the compensation will be done.

 

But what could possibly be the reason behind the collapse of a crypto giant like Terra? Was it because of its broken model or are there really conspirators behind its fall? As the controversy drags on, new stories and names have surfaced. There is an ugly rumor that whistleblowers tagged the Terra founder, Do Kwon, FTX CEO Sam Bankman-Fried, and Jump Crypto as the culprits. This was revealed by Twitter user @FatManTerra who claims to be working for the Terra Research Forum. He stated that Do Kwon was bailed out by Jump Crypto in May 2021. He further added that Do Kwon also owed Jump Crypto millions worth of LUNA. It remains unclear though what was the deal all about.  LUNA was trading below $1 in 2019 but has significantly increased at that time. Bankman-Fried allegedly made a 30% Serum handshake deal with Jump Crypto. But the story is not backed with evidence and thus remains hearsay. But despite this, the story has caused trouble and fear to crypto investors which highlighted the vulnerability and risk of the industry. 

 

Even with its downfall, investors still gambled with the new LUNA token but unfortunately, it has fallen short of their expectations. After surging to $40 on its launching on May 27, the price of the new LUNA token is now down to only $2.9009422 while the old LUNA (LUNC) crashed to only $ 0.000072 as of writing. The collapse of one of the biggest blockchain projects has resulted in a $40 billion wipeout of the industry’s market cap. The Terra controversy has once again put the industry in a bad light which now calls for regulation to protect the interest of the investors.