**Background of Terra Network:**
- **Founders:** Do Kwon and Daniel Shin
- **Purpose:** Create a new way to make payments using blockchain and stablecoins
- **Tokens:** LUNA and UST
**Rise to Fame:**
- By 2022, Terra's LUNA and UST tokens gained significant popularity.
- **UST (TerraUSD):** Designed to always be worth $1, backed by LUNA tokens.
**How UST Worked:**
- **Algorithmic Stablecoin:** Used computer algorithms instead of physical assets to maintain value.
- **Anchor Protocol:** Offered up to 20% yearly interest on UST deposits, attracting many users but raising sustainability concerns.
**The Collapse:**
- **Early May 2022:**
- Over $2 billion worth of UST was withdrawn and sold.
- UST lost its $1 value, dropping to $0.91, causing panic and more selling.
- **Impact on LUNA:**
- People exchanged UST for LUNA, increasing LUNA's supply and crashing its price.
- **Market Reaction:**
- Major exchanges stopped trading LUNA and UST.
- Terra blockchain was paused.
- Collapse erased about $60 billion from the crypto market.
**Detailed Consequences:**
- **Impact on Firms:**
- Companies like Voyager, Celsius, and Three Arrows Capital faced bankruptcy or severe financial problems.
- **Voyager Digital:** Filed for bankruptcy protection after significant losses.
- **Celsius Network:** Faced financial instability, froze withdrawals, and filed for bankruptcy.
- **Luna Foundation Guard:**
- Attempted to stabilize UST with Bitcoin reserves, but failed.
- **Do Kwon's Plans:**
- Launched Terra 2.0, but failed to regain trust.
**Legal Issues:**
- **Do Kwon's Missteps:**
- Gave false assurances about token stability.
- Took a $1 million bet that LUNA wouldn't crash and UST would remain pegged to the dollar.
- **Legal Trouble:**
- **September 15, 2022:** South Korea issued an arrest warrant for Do Kwon for fraud.
- Allegations of moving 40,000 BTC to secret wallets.
- **March 2023:** Do Kwon arrested in Montenegro with fake documents, facing extradition to South Korea and the U.S.
**Broader Market Impact:**
- **Industry-Wide Repercussions:**
- Significant loss of confidence in algorithmic stablecoins.
- Increased scrutiny and pressure on other stablecoins to prove stability and backing.
- **Regulatory Responses:**
- Governments and regulators began discussions on tighter cryptocurrency and stablecoin regulations.
- Potential requirements for transparency in reserve holdings and stricter risk management protocols.
**Lessons Learned:**
- **Risks of Algorithmic Stablecoins:** Can fail dramatically without tangible backing.
- **Importance of Transparency:** Honest communication is crucial to avoid significant investor losses and legal consequences.
- **Need for Regulation:** Proper rules can protect investors and ensure better risk management and transparency in the crypto industry.
**Moving Forward:**
- **Investor Caution:** Increased wariness of high-yield promises and algorithmic stablecoin stability.
- **Increased Scrutiny:** More scrutiny on stablecoin mechanisms and backing, leading to calls for robust regulatory frameworks.
The LUNA-UST crash underscores the need for clear rules, honesty, and good risk management, highlighting the importance of balancing innovation and regulation in the cryptocurrency market. Lessons from this incident will hopefully lead to a more stable and secure financial ecosystem.#Bitcoin_Coneference_2024 $BTC #BinanceTurns7
