Luna Crash Explained

Coinbase News, Floor Tracker, What's Dropping

May 12, 2022

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Happy Thursday, it's a rough week for all markets. Here at The Drop we always give you the breaking news straight (good or bad). After this newsletter drink some water, get some sun, and a nice stretch - today is a gift 😊

What's Dropping ⚡️

  • Otherside (YugaLabs' metaverse) released a sneak peek of "First Trip". It's worth giving a look here.

  • Psychedelics Anonymous' burning mechanism to create psilocybin just launched yesterday. To create one you have to burn Components 1, 2, and 3. Currently, the floor for the psilocybin is 2.25 ETH. Psilocybin will be used to create a Divine Entity and will help with staking rewards of $PSY.

  • Beeple & Madonna reveal their recent 3D model/video collection and in classic Beeple fashion has everyone talking (WARNING: NSFW). See the post here.

  • Ledger will be teaming up with Vee Friends at the upcoming Vee Con! This collaboration will exclusively be sold next week at Vee Con.

  • Akamai Technologies has just launched their art NFT which displays humanity's internet usage as an art piece, in real-time. This artistic interpretation is dynamically fueled by internet data. Have a look.

  • A hot air balloon festival in New Jersey is launching its own NFT collection of cartoon balloons during its festival beginning on July 29. This project will provide holders with free rides, merchandise, and more.

  • Soccer club Manchester City is releasing a digital collection with Puma on May 13. The art features a new design of PUMA's Ultra Football Boots.

  • Music NFTs have yet to be properly tapped into, but Band Royalty is doing something special by releasing the first-ever multi-track music NFT on their upcoming platform.

  • ‘Derivatives’, the second phase of The \V/alue Project, by 15-year-old LA street artist, eerieum_ drops today. The project features a ‘Collect to Earn’ model, which rewards early collectors by diverting funds from each drop to wallets holding tokens from prior collections.

$LUNA Crashes 📉

Buckle your seatbelts, because this one is gonna be one hell of a ride. We can't ignore the Terra ($LUNA) crisis unfolding before us because this directly affects the rest of the crypto market, tokenomics, and staking principles - which in turn in many ways intertwines NFTs.

Let’s begin by understanding how Terra’s ecosystem operates. There are two entities: $UST and $LUNA. $UST is an algorithmic stable coin that is pegged at $1. You can use $LUNA to redeem $UST at a stable price ($1 of $LUNA = 1 $UST) until very recently. $UST can (not anymore) then be used to stake on Anchor protocol at an APY of 19.5%. This is a simple rundown of the Terra tokenomics and what made Terra such a lucrative ecosystem to tap into.

Back in March, the Luna Foundation Guard (LFG) started buying Bitcoin (BTC) in order to help back $UST and by April 26th, they had amassed over $1.72 billion in BTC. This is the first vulnerability that the attacker exploited. From what we gathered on the matter, the attack started with someone (or a group) borrowing approximately 100,000 BTC and also creating an Over-the-Counter position of over $1 billion in $UST. In total, they had created close to a $4 billion BTC short position along with a chunk of the $UST market cap. LFG then removed $150 million from the liquidity pool they were using (3pool), waiting to switch to their new pool (4pool). They pulled this liquidity on May 8th, and that was when the attacker had everything needed to succeed in their venture. The attacker used $350 million worth of $UST to finish draining the pool liquidity to cause panic. This was just the start of what was about to unfold.

Being pegged at $1, $UST started to collapse and “de-peg” (this is very not good). LFG started selling BTC in order to defend the peg and keep it stable, but that caused BTC to start falling as well. With all the liquidity drained ($350 million from the attacker and $150 million from LFG), the attacker started using their leftover $UST to start offloading, which caused people to panic and sell-off. This completed the de-pegging of $UST.

The attacker is currently in a very good spot. Even by selling their BTC and $UTC at a loss, they can still buy back the BTC that they took as a loan at a lower price. All costs aside, if they bought their BTC at an average cost of $40,000 (average price during the time the BTC was bought), they have made over $1 billion off of the loan by itself because the current price of BTC is below $30,000 [($40,000 - $30,000) * 100,000 BTC = $1 billion]. This attack has caused $LUNA to plummet from a price of $89 to a mere $0.78 (at the time of writing) in a matter of days. $UST de-pegged and reached a low of approximately $0.30 ($0.68 at the time of writing). And remember, this is a stable coin that is supposed to be $1 at all times. That’s not just a collapse, but an all-out failure in tokenomics.

To add fuel to the fire, Terra's co-founder @stablekwon has been known to be extremely polarizing on Twitter - essentially tweeting everything you shouldn't tweet as a founder of a coin before and after it completely fails. There are also massive question marks about prior projects and possible scams he has been a part of quickly coming to light.

Will Terra recover? Is it a job from the inside? What entity is responsible for this? Is wall street finally using its dirty tricks in crypto? Time will tell. In the meantime, be vigilant.

 Coinbase Sends Warning 🚨

For those who value decentralization, know that Coinbase issued a new disclosure that essentially warns users that they will forfeit user's assets towards a bankruptcy proceeding in the unprecedented case of bankruptcy. In other words, a trader that keeps their coins on the Coinbase exchange can lose possession of their coins if the entire company goes up in flames.

It is an especially important time to realize the vulnerabilities your possessions are subject to given the tremendous volatility the entire ecosystem is encountering. Although the assumption is that the coins you possess on Coinbase are yours because they are in your wallet, it doesn’t change the fact that Coinbase has custody over all wallets in its domain. Cold wallet storage or transferring coins from Coinbase to non-custodial wallets is the best way for traders to ensure their ownership. The Twitter thread below explains what you are signing up for when you keep your assets on the Coinbase exchange.

I know we sound like a broken record but we can't stress this enough - get a hard wallet. Any crypto that you own in a brokerage of any kind truly isn't 100% yours. Although this announcement came out of the blue to many new to the space, this Coinbase announcement shouldn't have been to crypto natives.

Meme Drop 💧

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Disclaimer: The Drop DOES NOT provide financial advice. All content is for informational purposes only. The Drop is not a registered investment, legal, or tax advisor or a broker/dealer. Trading any crypto-related asset is extremely risky and could result in significant capital losses.

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