Let me take you back to May, to the glory days before the crypto end times. Back when everyone was a fan of Terra LUNA and its outrageously overconfident founder, Do Kwon–yes, that was 2022. By now, we know Do Kwon is a wanted man in South Korea and LUNA/UST entirely collapsed, crushing the crypto market and eradicating many of its biggest actors. But there is still one question left without a satisfying answer–how did this happen?
So on a high level, the attack occurred while UST liquidity was low in most DeFi ecosystems, which is how it was possible. We all knew liquidity was going to be low as there was a massive migration of UST into Curve’s ill-fated 4pool. The attack on UST happened during this migration, when the Terra ecosystem was most vulnerable.
The new developments this week came from an internal audit of the group responsible for keeping UST pegged and secure, LFG. We already knew that the organization behind UST with Do Kwon at the helm were taking some $80M each month out of the ecosystem, but what we just learned is that they started large scale liquidity withdrawals from UST in the days right before the collapse, to the tune of $450M.
This withdrawal of liquidity isn’t the thing that actually triggered the collapse, but it made the ecosystem so fragile that a relatively small amount of money was enough to destroy this $10B economy, and destroy trillions in value in cryptocurrencies overall. We’ve been hearing this whole time that UST was attacked, and that is why it collapsed.
That’s true, it was attacked. By the group that made it. LFG put no real money into the Terra ecosystem and consistently withdrew huge chunks of actual money that investors put in. Then they aggressively ramped up those withdrawals as the stablecoin went into a predictably low liquidity channel. What Do Kwon did is nothing short of an attack on investors. He lied to investors and systematically took their money, then fled the authorities.
These movements between wallets were observable on the blockchain, but an audit released by LFG actually revealed that the $450M in sales the days leading up to the crash was done by them–I have to wonder if owning that in the audit was an oversight.
My big question is why? If they succeeded in the Curve Pool migration, primarily by ensuring the liquidity pool was deep instead of draining it, they would have been fully embedded into the backbone of DeFi. They were already pulling down $80M a month from the liquidity, why ramp up right before a massive migration that would have made them essential to cryptocurrency operations across the board? I guess the safe assumption is just greed.