Why did Terra (LUNA) & UST fail? A Brief Overview

There have been a ton of great articles on the $LUNA/$UST collapse. In fact every day there is a different perspective on the motivations of the project. Was it all a planned ponzi from the start? Was it bad luck, or were they attempting to fix a known broken system? Perhaps I could look at it from the lens of Do Kwon himself. Maybe we were all too quick to judge – maybe, just maybe Do Kwon was only guilty of flying too close to the crypto sun?

Spoiler alert. I was dead wrong. The more I’ve researched, the worse it gets.

The more Do Kwon attempts to save his wings, the more damning the whole fiasco becomes.

Let’s start with a quick introduction in case the reader is not familiar with the Terra suite of products. There are three main associated products: $UST, $LUNA, and $ANC

According to the old Messari profile:

‘Terra($LUNA) is an algorithmically-governed, seigniorage share style stablecoin platform to which a collection of fiat-pegged tokens and a stabilizing cryptoasset, $Luna, are native.’

Terra Labs created $LUNA in 2018 with funding from Binance Labs, OKEx, Huobi Capital, and Dunamu, with the stablecoin $UST being launched later in 2020.

After gaining a lot of traction in 2021 – $LUNA and $UST collapsed in a spectacular 50 billion USD liquidation-style event.

You can read a couple articles on this here.

TL;DR is that Do Kwon the CEO and very public face of Terraform Labs via powers beyond their control wiped out almost 50 billion USD.

As per the wikipedia page:

‘Kwon Do-hyung (more commonly known as Do Kwon) (born 6 September 1991) is a Korean cryptocurrency developer who co-founded and is CEO of Singapore-based Terraform Labs, the unlicensed company behind stablecoin TerraUSD (UST) and network token Terra (LUNA), which both collapsed in May 2022, wiping out almost $45 billion of market capitalization.Due to the magnitude and controversy regarding his startup company’s downfall, Do Kwon has been likened by journalists to Elizabeth Holmes of Theranos, especially in his native country South Korea.’

Luna Origins

Let’s go back a little bit to the earlier beginnings of the Terra ecosystem.

One of the details that interested me the most about $LUNA when I first looked into it in early 2021 was the fact that they allegedly generated revenue from South Korean merchant fees.

The original consensus for investing in crypto products circa early 2021 was products that had independent, or unique revenue generation.

Basically non-crypto fiat revenue.

I recall reading on multiple reputable websites about a reasonable number of Korean merchants using Terra for payment settlement, and I was hooked. Perhaps they were just talking about CHAI?

CHAI was/is a Korean-based payments startup that had a crypto-based debit card. It had about 2.5 million users in late 2020. You can read more about this in an old news release here.

BUT! Wait a minute – Terra never had any payment processing? It was just CHAI implying that they would eventually get there? CHAI for example has deals with 15-20 banks and:

‘Today, we are excited to announce a breakthrough partnership with CHAI, a newly launched Korean mobile payment service. CHAI is currently available on TMON — one of the largest eCommerce platforms in the country with 10 million users and $3.5 billion in GMV — and is to become available to all of Terra’s eCommerce partners.’ (July 11th 2019 – Terra Medium page)

Going back to information on Terra I don’t see them talking about merchant fees anymore – perhaps I’ve lost the links, or maybe it was an overly-hyped Solana Pay-type system. It’s hard for me to remember as the narratives change so fast in crypto. I specifically remember reading about a percentage of merchants in South Korea who used Terra? Chai? For payment processing? It was definitely implied to be Terra. How do I know this? I was the one doing the research.

This article speaks about how the founders of Terra said one thing, but…

‘However, stablecoins needed a way out with rails like Kakao or Samsung Pay and in this supposed Korean acceptance, still 70% of mobile payments are channeled through credit cards.’

They didn’t have any payment offramps setup! They were just growing to the point that crypto would go mainstream and then they would get access to where they needed to get to. The rails in this author’s opinion were vapor, or optimistic at best – they tried to pull the rumored Tether trick and broke down before the finish line.

Terra was building $UST and $LUNA on the assumption of developing something like Solana Pay, or Lightning Network to use with the CHAI customers. Daniel Shin had CHAI, and before that he had Ticket Monster (TMON). From the same Medium article below:

‘As a first step of this partnership, Terra and CHAI will work together to find ways to utilize Terra’s blockchain technology. CHAI provides the infrastructure of a payment gateway, offering both secure, reliable, and fraud-resistant transactions and convenient settlement with merchants in fiat. And by offering Terra’s blockchain technology through CHAI, we will rebuild the payments stack on the blockchain to simplify the legacy payment system and provide transaction fees at a discounted rate to merchants.’

I know a lot of people were very big on doing a deep dive on exactly what happened, where was the reserve bitcoin, what was the exact order of events, and when did the founders know they were in a death spiral?

Well firstly it looks like they were running an amazing pitch deck together – both Do Kwon and Daniel Shin were using the magic words ‘payment processing’, and ‘blockchain technology’. It’s frankly amazing they didn’t have even more money thrown at them. 

My point is that it’s more likely an Occam’s Razor scenario.

The simplest solution is most likely what we all think it is.

Terra was trying to be too big to fail and can you really blame them? It’s the leftover ethos from the TradFi culture. Dog eat dog, PvP – only the true champion utilizes the Game Theory correctly and pulls a Highlander, becoming the one true most-valued, unicorn payment stablecoin.

They never got far enough with the on/off ramps to fiat and the large community they built has suffered immeasurably.

The point I’m trying to make is that originally I was going to write this article as more of a Do Kwon (come on he’s not that bad article) to a pivot of this is the filth that we’ve invited by not being more clear about the risks to new retail users.

It’s looking a lot like Terra didn’t really have a product at all.

It’s starting to look like the product was a multi-token dance ponzi between $UST, $LUNA, and $ANC.

Shit happens, but where is the product? Where are the merchant fees? Where are the development logs from CHAI? Was there actually nothing except three tokens, Do Kwon, Daniel Shin, and the COMMUNITY?!?

I mean it’s not like Do Kwon NEVER submitted an application for a license in Singapore?

TerraForm Labs, the company behind UST, is incorporated in Singapore but did not submit an application for a licence under the Payment Services Act according to The Straits Times. It is also not a notified entity, meaning it has not been granted temporary exemption from holding a licence by the Monetary Authority of Singapore. (wikipedia)

Or dissolved the South Korean corporate entity just before this crash?

According to documents filed by Do Kwon himself at the Supreme Court of South Korea’s Registry Office, Kwon filed to dissolve the company’s Korean entity on April 30, 2022, and was granted approval on May 4, 2022, just days before the UST and LUNA crash took place.(wikipedia)

Remember at Messari Mainnet when Ryan Selkis vocally supported Do Kwon for his reaction to the SEC subpoena regarding Anchor.

The US SEC issued a subpoena for Terraform Labs and Do Kwon in 2021, with specific regard to the “Mirror Protocol” of his company that designed and offered financial derivatives that virtually “mirrored” actual listed stocks. Do-hyung responded by stating that he woundn’t comply with the demands, and instead would be suing the SEC. Despite Do Kwon’s attempts to dispute and avoid investigations from the SEC, a US Court hearing in Manhattan in February 2022 ruled in favor of the SEC’s right to continue its investigation into Do Kwon and Terraform Labs.(wikipedia)

The Lunabomber is loose.

Binance isn’t exactly snuggling up close.

Starting to really feel like CZ founder of Binance might have had to do a favor and buy some time for Do Kwon while he rearranged his future, or even more likely he’s super pissed he got associated with this whole mess.

I would never trust $LUNA again unless the community takes over from the original founders.

Considering other rumors about Do Kwon’s past with Basis Cash I would be hard pressed not to run like hell from anything associated with these dudes again. Also considering how Binance is reacting it seems like the last thing they want is this crypto hot potato in their backyard.

Let the legal liability begin.

Frequently asked questions

What is Terra (LUNA)

Terra is a blockchain protocol focusing on payment processing using their basket of stablecoin, and lending products.

What is UST?

UST is a decentralized algorithmic stablecoin that aims to maintain the value of 1 UST=$1. UST is the ticker symbol for TerraUSD.

What is an algorithmic stablecoin?

An algorithmic stablecoin is a stablecoin not pegged to any national currency, but instead pegged to usually more volatile crypto assets and/or currencies.

What is Terra 2.0?

Terra 2.0 serves as a fork of the original Terra blockchain, as the original LUNA token is renamed Luna Classic (LUNC) .It was an attempt of salvaging value for anyone left holding any of the Terra suite of cryptocurrencies