Only when the tide goes out do you discover who’s been swimming naked

7 min readJun 6, 2022


Several years ago a friend and I could be heard blabbering, in the corner of a pub in Moorgate, what would happen if/when Tether could depegged from the dollar. We eventually decided that as long as nothing had fundamentally changed in bitcoin then it would represent one of the best buying opportunities in the still-fledgling asset. So watching the collapse of the algorithmically (un)stable stablecoin, UST, and its twin LUNA, has been pretty interesting.

The crypto market has taken an impressive dive in the last few months, trending downwards since the start of the year, exacerbated by violent step downs at times. It’s made for some busy trading periods and is the type of movement that makes it fun to be a participant — even when there’s some hurt. While nothing has fundamentally changed in bitcoin, the dip does show bitcoin continues to be strongly correlated with tech stocks and other risk-on assets.

While these dips are part and parcel of the crypto world, stocks have taken a slide and are wobbling on bear capitulation. Tech stocks are on a downward trajectory, the bond market appears to be setting up a bull trap, growth-at-any-cost firms, SPACs, meme stocks and disruptive tech have taken hits, inflation and the cost of living crisis dominate most news cycles. Moreover, there is actual talk of the UK property market slowing, which is the surest of signs that Hell hath frozen over.

This all points to the end of the astonishing market conditions of the 2010s being over as central banks begin tapering relief after a final send-off with the covid recovery packages. As bitcoin has been a huge benefactor of these conditions, the pain may not be fully over until other markets find new ground. But as with any sort of violent movement the terms; RSI, Bollinger bands, Elliot waves, log curves and a plethora of others have been creeping back into rotation. Many of which signal similar oversold market conditions as March 2020, when bitcoin hit around $3,500, before starting its ascent to $65,000.

The collapse of UST and the extra downward pressure that caused, is, perhaps, a sign that the crypto market is tired after an 18-month run. It feels very similar to previous cycles, in that new mechanics of creating and extracting wealth via crypto were found and made people fabulously wealthy and others take to Twitter to complain of their losses. In 2017 it was ICOs and token events, and now it was in NFTs and defi. The vast majority of these projects fade away as only very keen stakeholders remain or abandon the projects, a small number implode spectacularly and a few are found out to have been scams all along.

Watching from the sidelines as NFTs grew substantially, it felt excessive, it felt unreal that the amounts being thrown around were in any way reasonable and a bit bitter not to have hopped on when the first few were popping up. Very similar sentiment to the ICO raises and token values for projects, the best of which were being done out of bedrooms and shared offices back in 2016/7. The harder market conditions over the last 3 months have exposed who wasn’t wearing a swimsuit when the tide receded and ended in some fireworks. The natural purge of the market that occurs after the crypto-space has run out of steam and the values of 99% of the market is found to have been excessive. However this time there is a fair bigger backdrop to the wider market that may make the downwards pressure on cryptos deeper and longer than some would hope or expect.

But, if that is the case, it always represents a very good time to build for the next run, whether that be by averaging into the market or by building out new tech. The NFT craze may be over but the ability and concept are going to remain, as with tokens before that evolved into being able to easily create NFTs. Similarly DeFi has been a fun place to poke around in during the run and has shown that new models of lending and saving practices can exist in crypto, but the collapse of UST has shown the fragility of it and some of the shambolicness of the practice as it currently stands — very similar to the tokens created in previous cycles.

UST and Luna is the type of black swan type event for crypto that seems to happen at the tail end of every major cycle. In that, it garners huge attention by promising excellent returns and ultimately gets found out for being a large digital Ponzi. Moreover, the number of issues defi protocols have been experiencing in the recent past has grown considerably as new attack vectors on algorithmic coins and indexes are discovered.

Ultimately this was the downfall of Terra and UST. It is not worth going into the intricacies of how and why the initial dollar peg was lost other than acknowledging huge outflows of UST from the Anchor protocol started a run from other investors to get out. Whether that be a malicious attack, savvy trading or some other reason is still somewhat up in the air, but if it could not survive such adversity then it was always destined to fail eventually.

UST was an algorithmically stable stablecoin pegged to $1 that was paired with the LUNA token acting as a floating peg to counter the volatility found in crypto. Users were able to use LUNA to mint UST at a 1:1 value with LUNA. So say the price of LUNA was $100, you would be able to mint $100 of UST and ‘burn’ the LUNA. It meant there was arbitrage potential of USD and UST when the $1 peg was lost until the dollar peg was found again. However, users who were able to deposit UST in the Anchor protocol (a lending & borrowing market operated by Terra Labs) were given a rate of 20%, which is so reminiscent of Iceland’s bank offering 18% rates shortly before collapsing. A lot of that 20% rate was subsidised by the Luna Foundation Guard and VCs.

During the collapse an eye-watering amount of bitcoin was sold by the Luna Foundation Guard (an organisation from the creators of Terra to support its growth and development), going from a reserve of 80,394 BTC to 313 BTC in “a last ditch effort to defend the peg”. Some $3.5 billion of downward pressure was added to an already deflating bitcoin market as chain analysis shows the majority of the reserve went to trading account wallets at exchanges, but knowing if the bitcoin was sold to defend the peg or for other reasons is impossible — although one suspects it was unceremoniously dumped into the market given the market conditions during the affair.

The UST saga fallout has some lessons on how DeFi and yielding accounts operate as well as the amount of contagion that operates in crypto. First off it shouldn’t be understated that this was a complete wipe of the $50billion Terra chain, not a small amount, but a lot of other DeFi protocols were heavily affected for various reasons.

The flight from risky assets in the sector as a whole caused many imbalances in the liquidity pools and depegged tokens, staked Ethereum (stETH) was trading 3% below Ethereum (ETH) at some points and many others lost their pegs either temporarily or completely. People were selling UST under the peg in a panic too. No one is really to blame for this, as it is each investor’s decision to move out of the projects. But there were some other protocols that made huge losses in the panic.

The venus protocol fetched its price from the Chainlink oracle, which stopped updating the price of Luna below $0.1, so traders were able to lend Luna at x10 its value for a period, costing the protocol $13.5m. This also happened to Blizz Finance on the Avalanche protocol, whose value went from $10m to $0.

The Gro Protocol and Mushroom Finance were heavily exposed to UST in their yielding strategies, using the yield generated from UST lending in the Anchor protocol to give depositors yields of their own. Gro took $35m in losses and mushroom finance is all but dead with the total value locked now at $50,000, down from a high of $30m.

There are also cases of horrendous oversights in the code of protocols. Kava hardcoded UST to $1, meaning people were able to mint their own stablecoin, USDX, with UST, all while UST was dropping down to -99% and then swap the USDX into other assets. USDX, predictably, also suffered a collapse once the strategy was known. When a fix was made the price of UST was pulled from an oracle instead of being hardcoded. However the oracle had stopped updating, so the price was still much higher than the rest of the market, and the arbitrage continued, albeit with less profit, before eventually stopping UST from being used to mint UDSX.

Celsius, one of the most popular crypto-yielding accounts, also had exposure but was able to recover around $500m during the collapse. This is not the first time Celcius has been exposed to protocol failures having lost $54m in December 2021 after the hack of the BadgerDao. It is concerning that a number of these supposedly safe and regulated yielding accounts are based on strategies exposed to such high-risk assets. Binance’s LUNA holdings are apparently sitting around $2,200, down from a high of $1.6 billion, after spending $3m investing early in the project.

On the other hand, everyone’s favorite crypto canary, El Salvador, has hosted a financial inclusion conference with finance ministers, central bankers and delegates from 40-odd emerging countries seeing the use of bitcoin and lightning payments in the country. Probably nothing.




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