Writing a year after Terra's thunderstorm: The market is improving, but the gloom is still lingering

Do know The arrest and subsequent lengthy trial and sanctions will not bring the whole incident to an end. In this year's time, what have we lost and what have we gained after the Terra thunderstorm?

Written by: ChainCatcher Editorial Department

On March 23, Do Kwon was arrested in Montenegro. In May of last year, Do Kwon had been rumored to have tried to flee South Korea before Luna collapsed, but he has always denied it. Until being issued a red notice by Interpol and chasing Serbia all the way from Singapore, Do Kwon was still quibbling that he did not "escape" until the moment he was arrested in Montenegro.

Source: Associated Press

When Do Kwon was arrested, his fat face was slightly dazed. During the ensuing investigation, he was accused of forging a passport and was even rumored to have "swallowed a hardware wallet". The "suspect" in front of him is completely different from the young man who lacked awe and was extremely confident a year ago.

At the end of the year and the beginning of the year in 21 and 22, Do Kwon was full of hope for the new year on social media. He wrote: "Web3 is the key to the encryption industry in 2022" "May the moon shine brighter this coming year ".

He and the fanatical Lunatics would never have imagined that this "new moon" would start to dim after only a little over a quarter. In a market where emotions are rising, it is always easy for people to treat young people with confidence and high spirits differently, including SBF at that time. In a report by Bloomberg, Do Kwon had built a "confident, aggressive and occasionally childish" image on social media.

In March 2022, the Terra and UST algorithm stablecoins encountered frequent doubts from the outside world. Subsequently, Do Kwon chose a very aggressive way to respond to the doubts—betting with encryption KOL Sensei Algod on whether the price of LUNA could exceed the current price of $88 after one year. The bet was $1 million, and a day later Do Kwon upped the stake again to $10 million. The bet between the two was overseen by crypto KOL Cobie.

Yet that hilarious bet didn't even make a splash when it expired in March. As a supervisor, Cobie remained silent on the matter that day. After the sponsor FTX collapsed, the encrypted podcast Uponly he hosted also stopped, and he rarely mentioned the connection with FTX afterwards.

Sensei Algod, who made the bet, quoted a tweet from a year ago and wrote: "Although looking back, we can easily judge that Luna will collapse, but look at the comments on the tweet a year ago, you will Know how I was laughed at at the time. It is a good lesson to realize that the masses will often make mistakes." After all, people will eventually realize that "the moon waxes and wanes" after they suffer.

In fact, there was no shortage of whistleblowers during the Terra thunderstorm and UST crash. When Terra first appeared, some analysts noticed the risk of triggering a "death spiral" in this protocol. With the Anchor protocol launching a 20% APY UST deposit plan, more people began to predict the collapse of Terra, and some even proposed "Terra will destroy the entire crypto world" warning.

But few people can resist the temptation of such a high return, and everyone has smelled the danger of the Ponzi scheme. But people subconsciously think that they are the one who can get out before Terra collapses. After all, professional and authoritative veterans like Jump Crypto, Hashed, Delphi, etc. have not escaped this disaster.

As Algod mentioned above, it's easy to introspect in hindsight. People who are inexperienced and do not have a stop-loss strategy are mostly stunned and numb in the heavy losses a year ago.

The Terra incident became the worst starting point for 2022. After that, the fire followed a fuse that seemed to have been buried long ago, detonating one blockbuster project after another. The price of Bitcoin fell all the way from $34,038, and today it has not recovered a year later. Although the market is steadily recovering, the price of Bitcoin also fell back to $31,043 at the beginning of this year. But it is undeniable that the market is still shrouded in the series of thunderstorm incidents last year, and the hidden danger of thunderstorms is still not ruled out.

Do know that the arrest and the subsequent lengthy trial and sanctions will not bring the whole incident to an end. But in a year's time, what have we lost and what have we gained after the Terra thunderstorm?

In addition to three arrows capital, Voyage, Celsius, FTX and other leading crypto companies that have gone bankrupt, hundreds of projects have also died or disappeared in the rapidly cooling market; investors have begun to re-examine the criteria for judging crypto projects. The hot money in the industry rarely flows to encryption and Web3; under the multiple pressures of multiple countries, led by the United States, the regulatory policies of many countries, banks cutting off encryption-related businesses, and market makers opting out, crypto companies such as Coinbase, Kraken, and Tether began to seek global The market, encryption companies and Web3 entrepreneurs are like migratory birds, traveling from the United States to Singapore, Dubai, and then to Hong Kong, constantly looking for the "encryption sanctuary" with the most suitable climate...

This article will provide a quick review and (incomplete) overview of the important events and impact of the Terra thunderstorm one year later.

1. Review of serial thunderstorm incidents

1. Terra crashes

On May 8, 2022, because Terra wants to form a new fund pool 4Crv Pool (UST/FRAX/USDC/USDT) for UST on Curve, the original UST-3Crv (UST/USDC/USDT/DAI) fund pool UST liquidity of 150 million US dollars was withdrawn in 2019, and the price of UST began to destabilize slightly.

In order to avoid risks, some institutions and users began to sell UST on a large scale. On that day, 2 billion USTs flowed out from the lending platform Anchor, which increased the pressure on UST price anchoring. Due to the sudden appearance of a large number of UST in the market, the price of UST has further aggravated the decline. Many people have replaced the UST in their hands with their basic asset LUNA, which has also led to an increase in the supply of LUNA and the price has plummeted all the way. LUNA and UST prices went into a death spiral, and the prices were close to zero.

On May 11, Do Kwon announced that it could not rescue the market.

On May 13, many exchanges delisted Luna and suspended trading, and the Terra public chain ceased operations.

In less than a week, the Terra ecosystem with a market value of over 40 billion collapsed. The thunderstorm of LUNA/UST has affected many encryption institutions and encryption projects. The BTC price dropped from $34,038 to $31,328, a 7.6% drop for the week.

2. Sanjian Capital declared bankruptcy

Among them, Three Arrows Capital, one of Terra's largest investors, was the first to publicly announce that it was affected by the LUNA/UST crash, because Terra's crash was deeply involved in a liquidity crisis.

Three Arrows Capital invested another $200 million in LUNA/UST during its collapse. According to data from clearing firm Teneo, the risk exposure of the LUNA/UST collapse to Three Arrows Capital is about $600 million.

In addition to direct financial losses, as the LUNA/UST crash affected crypto market sentiment, BTC prices also fell from $30,000 to $20,000, which caused a massive credit contraction in the crypto market.

Three Arrows Capital happened to use a large amount of leveraged funds, but due to the lack of liquidity of its large amount of assets (such as GBTC worth US$1 billion held), it could not be sold, and it could not be called for margin, which caused the assets of Three Arrows Capital to shrink wildly. At the same time, due to the inability to repay the borrower's funds, the creditor requested compensation.

3. Voyager goes bankrupt

The thunderstorm of Three Arrows Capital led to the closure of more lending platforms in a row. Due to the outstanding loan of Three Arrows Capital, it involves about 666 million US dollars (including 15250 BTC, 350 million US dollars equivalent USDC stable currency).

On July 6, 2022, Voyager, an encrypted lending platform, announced that it would file for bankruptcy protection and suspend services such as transactions, deposits, and withdrawals.

On July 11, 2023, Three Arrows Capital filed for bankruptcy protection in a New York court. According to the Teneo liquidation report, Three Arrows Capital owes about $3.5 billion to 27 cryptocurrency companies. These creditors have already filed lawsuits against Three Arrows Capital.

Among them, the largest creditor is the encryption lending platform Genesis, which is a division of the Digital Currency Group (DCG) subsidiary, which provided a $2.3 billion loan to Three Arrows Capital. Part of the debt of this claim is assumed by its parent company DCG, because Three Arrows Capital holds the US$1 billion GBTC trust issued by DCG. Therefore, in the end Genesis filed a $1.2 billion claim against Three Arrows Capital.

Second, the encrypted lending platform BlockFi stated that Three Arrows Capital was one of its largest borrowing customers, and the company's collapse caused the company to lose about $80 million.

4. Celsius Bankruptcy

On July 13, 2022, Celsius, an encrypted lending platform for institutions, announced to file for bankruptcy, and Sanjian Capital owed USD 75 million in USDC loans.

In addition to the impact of Three Arrows Capital, Celsius is also affected by the LUNA/UST crash, because it is the largest holder of stETH (Ethereum pledge certificate on Lido), affected by the UST unanchored crash market sentiment, resulting in the unanchored price of stETH against ETH . With the decline in the value of stETH and the aggravation of platform liquidity problems, users of the platform were severely squeezed, and they were forced to sell stETH at a low price to meet the needs of users to redeem assets. In the end, it declared bankruptcy due to severe insolvency.

5. FTX Thunderbolt

On November 11, 2022, more than 100 entities of the cryptocurrency trading platform FTX, including its affiliates, have filed for bankruptcy protection in the United States.

The demise of FTX stemmed from a document disclosed by CoinDesk. On November 2, 2022, CoinDesk disclosed that Alameda Research may currently be insolvent.

On November 6, 2022, Changpeng Zhao publicly expressed concerns about the solvency of FTX, and Binance decided to liquidate all remaining FTT on its books. It triggered a wave of user withdrawals to FTX and Alameda, and billions of dollars in assets flowed out from the relevant wallet addresses of FTX and Alameda.

On the evening of November 8th, FTX suspended user withdrawals. FTX's funding gap is as high as $8 billion.

On November 11, cryptocurrency trading platform FTX filed for bankruptcy protection.

With the disclosure of FTX's bankruptcy documents, people discovered that FTX and Alameda had already fallen into crisis. The data shows that Alameda had liquidity problems as early as May due to reasons such as the Terra thunderstorm and the bankruptcy of Sanjian Capital. In order to rescue Alameda from the bankruptcy of Voyager and Three Arrows Capital, FTX suspected of using FTT tokens as collateral to borrow money from Alameda. This also made FTX the biggest trigger for liquidity shortage.

The price of BTC fell from $20,905 to $15,500, a 21% drop for the week.

6. BlockFi Bankruptcy

On November 28, 2022, cryptocurrency lender BlockFi announced that it would file for bankruptcy protection with the court.

It has more than 100,000 creditors owed between $1 billion and $10 billion, it said in court documents. Among them, FTX ranked second with $275 million in debt.

7. Genesis Bankruptcy

On Jan. 20, crypto lending platform Genesis filed for bankruptcy protection.

After the FTX thunderstorm, Genesis's derivatives business had $175 million stranded in FTX. Prior to this, due to the thunderstorm of Three Arrows Capital, Genesis suffered a loss of as much as 2.36 billion US dollars. The company halted withdrawals and new loan originations at its lending affiliates on Nov. 16. The price of Bitcoin remained at around $21,000.

2. Chain effect: the decline of algorithmic stable currency and the exploration of stable currency supervision

After the thunderstorm of Terra and the algorithmic stablecoin UST, in addition to causing a series of thunderstorms of related projects, it also directly aroused the market's attention to stablecoins.

First of all, after the collapse of Terra, people tried to protect their own rights through legal channels, but found that they could not find corresponding regulatory laws at all. Until April 19, 2023, the Financial Services Committee of the U.S. House of Representatives issued a 73-page "Stable Coin Act Discussion Draft", which clearly mentioned the disposal method of algorithmic stable coins: neither can guarantee a one-to-one asset reserve, but also Stablecoins that do not directly or indirectly hold U.S. dollars must be blocked.

Although this draft does not represent the final bill, the stable currency has attracted the attention of regulators. Compared with discussions such as "whether encrypted assets are securities", the regulatory needs of stablecoins are more urgent.

Second, algorithmic stablecoins declined rapidly after the Terra incident. According to Defillma's data, from May 8 to 15, 2022, the share of USDC and USDT increased by about 3%, and the market share of algorithmic stablecoins was eroded.

USDN is an algorithmic stable currency launched by the WAVES protocol, which uses a peg mechanism very similar to UST/LUNA. USDN started unpegging almost in sync with UST. In early 2023, USDN will transition from a stablecoin to a Waves ecological index token, and will no longer be anchored to the US dollar 1:1, basically giving up the algorithmic stablecoin track.

The USN launched by Near Protocol began to use USDT to mint USN after the collapse of UST. However, the project ultimately failed due to a “$40 million collateral gap” due to double minting.

In addition, decentralized stablecoin projects have also been affected. The DAI launched by the MakerDAO protocol has dropped from more than 8 billion to a market value of 4.8 billion US dollars, and has not yet recovered; in February 2023, Frax announced that it would set the target mortgage rate (CR) to 100%, remove the part supported by the algorithm, and replace FRAX Become a fully collateralized stablecoin.

Although this year, some DeFi giant agreements have begun to develop stablecoin businesses, such as the over-collateralized stablecoin crvUSD issued by CRV and the over-collateralized stablecoin GHO to be launched by Aave. These stablecoins are completely different from UST, adopting a more conservative mechanism.

3. The reasons behind the serial thunderstorms

1. The ecology is too concentrated

Taking Terra as an example, the 20% APY has helped Terra quickly absorb a market value of tens of billions of dollars in a short period of time and develop rapidly. The algorithmic stablecoin system may seem flexible, but it is extremely fragile. The most important thing is that Terra's ecology is too concentrated and single. According to the data in April 2022, Terra's lock-up volume exceeded 30 billion US dollars, of which Anchor accounted for 51.15%, exceeding 15 billion US dollars. In essence, the Terra ecology does not have a DeFi protocol that can really absorb UST. When the application demand of UST in Anchor drops sharply, it is destined to lead to the complete collapse of UST and LUNA.

In addition, the reason for the collapse of FTX was also the mistake of putting too many eggs in the same basket, and most of FTX's assets are directly related to FTT.

2. Too much leverage

Unlimited nesting dolls and excessive leverage became the direct cause of Sanjian Capital's bankruptcy: Sanjian invested in a certain derivative with anchor value through leverage, and pledged the derivative to obtain highly liquid collateral, and then sold the collateral for further investment. arbitrage. When the derivatives and the underlying assets were unanchored, the price and liquidity of the derivatives dropped sharply, and Sanjian could not sell the derivatives within the effective time to deal with the run on creditors and eventually led to bankruptcy.

Too much leverage, too much leverage has been one of the biggest systemic risks in the crypto market. Although the nested models can generate a spiral positive feedback for the encryption industry during the period of market stability and improvement, it also leads to a snowball effect when the market declines.

3. Lack of supervision and lack of transparency in CeFi

Since the day the encryption industry was born, it has lived in the shadow of regulatory uncertainty. The encryption industry lacks effective supervision of institutional behavior, and CeFi project parties such as Three Arrows and FTX have mastered the right to over-centralize and not be supervised, leading to the disorderly expansion of capital.

Although exchanges such as Binance took the lead in disclosing the reserve Merkle tree after the series of thunderstorms, they still lack the endorsement and supervision of an authoritative third-party organization, and the lack of a punishment mechanism does not have high credibility. The industry still needs to explore better on-chain custody methods and audit mechanisms.

4. The "God-making Movement" that the encryption circle enjoys endlessly

The rapid rise of Do Kwon, Suzhu, SBF and the projects they created in a short period of time is due to the collusion of the mass market, media and capital.

5. Human nature remains the same

Finally, there is an old saying: speculation is as old as the mountains, and there is nothing new on Wall Street. Speculators use greed to build high buildings, while short sellers use panic to reap huge profits. History repeats many times not because of internal social laws, but more because of eternal human nature.

4. Take a serious look at the "elephant in the room"

A coin has two sides. Although a series of thunderstorms such as Terra and FTX hit the industry hard, they also punctured the huge bubble created by the last round of bull market, and the industry began to re-examine the "elephant in the room." Industry value standards, security mechanisms, and supervision are all moving towards a new level.

In terms of industry value standards, the so-called "head" is disenchanted. Terra, FTX, etc. are all encryption giants with a market value of tens of billions, backed by top investors represented by Temasek, Sequoia Capital, and Grayscale, but the collapse is also instantaneous. This makes the industry realize that too big is not an iron law, and authority will also lose credibility. And when the speed of hot money entering cannot keep up with value creation, the biggest minefield is often planted.

After the thunderstorm, the valuations or prices of most first- and second-tier projects gradually corrected, moving in a healthier direction. Investment institutions led by Temasek have also successively launched review studies and improved their investment processes. And some encrypted users may no longer be easily confused by financing background and dream stories.

According to RootData data, in April 2023, financing in the encryption field was US$814 million, a decrease of approximately 77.6% from US$3.623 billion in April 2022. In addition, the number of financings dropped from 186 to 106 in April, a year-on-year decrease of approximately 43.1%.

At the same time, the transparency of the encryption industry is also increasing. After the FTX incident, centralized exchanges headed by Binance, Kraken, OKX, Huobi, etc. have disclosed reserve certificates and accepted industry supervision, although at this stage there is still a lack of endorsement by authoritative third-party audit institutions. After the collapse of FTX, companies and individuals invested more in financial management and compliance, and projects and innovations related to encryption and accounting are on the rise. Encrypted project financing regarding encrypted finance and on-chain asset custody solutions is frequent.

In addition, the hazards of continuous thunderstorms have also forced encryption supervision to speed up the progress and find a balance between the innovation and development of the encryption industry and orderly supervision. At present, countries or regions and organizations dominated by the United States, Hong Kong, South Korea, Japan, Singapore, and the European Union lead the development of industry regulatory standards. By the end of 2022, in addition to mainland China, more than 42 sovereign countries and regions around the world have adopted 105 regulatory measures and guidance for the encryption industry. Among them, the United States has a total of 22 items, including encryption transactions, encryption regulatory guidance, judicial judgments, stable coins, etc.; the European Union has a total of 9 items, involving encryption regulatory guidance, stable coins, and anti-money laundering in a series of bills; South Korea has produced 8 items, mainly In judicial decisions, stable coins, encryption regulatory guidance, etc.

Although the progress of encryption regulation in various countries or regions is different, and attitudes have also produced great differences, encryption regulation still shows a trend of globalization and refinement.

5. "Rise in the East and Set in the West": the evolution of encrypted regions under the regulatory trend

The United States is one of the largest crypto markets in the world and one of the most complex regulatory environments. There is no unified encryption regulatory agency in the United States, but multiple federal and state-level agencies are responsible for the supervision of different fields. In the wake of Terra, U.S. Treasury Secretary Janet Yellen called for stablecoins to be regulated by the end of 2022 to protect consumers and financial stability. She also urged Congress to pass legislation giving the Treasury Department the authority to regulate stablecoins and other digital assets.

After the collapse of FTX at the end of last year, the US SEC has strengthened its regulatory attitude towards the encryption industry and began to review and prosecute some encryption projects that may be involved in securities law violations, including leading encryption companies such as Binance, Coinbase, and Kraken. At present, due to the continuous pressure of the US authorities on the encryption industry, some projects have chosen to "flee" the US and turn to expand their business globally. Market makers such as well-known crypto market makers Jane Street and Jump Trading also plan to exit the crypto trading business in the United States. Although the United States has stricter regulations on the encryption industry, it is not completely exclusive, and at the same time recognizes the innovation potential and social value of the encryption industry.

South Korean authorities launched an urgent investigation into the Terra case and the possible violation of fraud, money laundering or tax evasion laws by the project’s founder Do Kwon and those involved. South Korea’s Financial Services Commission (FSC) also announced plans to strengthen regulation of cryptocurrency exchanges and platforms, requiring them to register with the government and comply with anti-money laundering and consumer protection regulations. Even though the current government is still dealing with the aftermath of "Terra", South Korea is not as aggressive as the US government. Recently, the South Korean government has drafted some regulations, and the Bank of Korea also plans to introduce separate regulations on stablecoins to keep the crypto industry going in South Korea.

In the case of uneven regulatory development in various countries and regions, a new regional trend has emerged in encryption innovation, and some views even summarize this trend as "rising in the east and falling in the west". Encryption companies and Web3 entrepreneurs are like migratory birds, traveling from the United States to Singapore, Dubai, and then to Hong Kong, constantly looking for the "encryption sanctuary" with the most suitable climate.

Under the slogan of "encouraging innovation and development", the Singapore government first embraced Web3. Singapore is one of the main centers of crypto innovation in Asia, home to many crypto projects and companies, including Terraform Labs, and has issued several payment institution licenses. Singapore already has a comprehensive cryptocurrency regulatory framework known as the Payment Services Act (PSA), requiring cryptocurrency service providers to be licensed and comply with anti-money laundering and counter-terrorist financing rules, while the government has also adopted a relatively friendly and flexible regulatory approach . A series of initiatives allowed Singapore to revitalize the Web3 industry once again. In the second half of 2022, various Web3 conferences held in Singapore successfully aroused the enthusiasm of Chinese Web3 entrepreneurs, and further pushed the "Eastern Web3 Power" and Chinese projects to the global encryption market.

Hong Kong follows Singapore's footsteps as the world's leading international financial center, but aims to achieve the status of a global Web3 hub.

In December last year, CSOP Asset Management Co., Ltd. launched Asia's first batch of virtual asset ETFs, Bitcoin ETF and Ethereum ETF in Hong Kong. Although many encryption projects gathered in Hong Kong in April this year, the current requirements of the Hong Kong government for the encryption industry are actually more stringent. The regulatory framework proposed by the Hong Kong Monetary Authority (HKMA) requires all institutions that provide encrypted asset trading platform services to apply for licenses and comply with anti-money laundering and anti-terrorist financing regulations. In addition, only professional investors who meet certain conditions can trade through these platforms, retail investors are excluded. The HKMA said this was to protect investors' interests, guard against financial stability risks, and safeguard Hong Kong's reputation as an international financial centre.

Previously, Yu Weiwen, President of the Hong Kong Monetary Authority, stated that virtual assets will be developed in a sustainable manner and will not be "soft" in digital asset supervision. In general, Hong Kong is supporting and accepting the development of the encryption industry in Hong Kong with a stricter and more cautious attitude.

In Dubai, a relatively open and pro-crypto innovation stance remains after the events of Terra. The government has launched several initiatives to promote blockchain and crypto in the space, such as the Dubai Blockchain Strategy, Dubai Future Foundation, and Dubai International Financial Center (DIFC). Dubai also offers a flexible regulatory framework for cryptocurrency businesses, allowing them to operate under a sandbox regime or obtain a license from the DIFC or Abu Dhabi Global Market (ADGM). At present, due to the subsequent collapse of FTX, Dubai has re-examined the risks of the encryption industry, and the Dubai Virtual Assets Regulatory Authority (A) has strengthened the review of projects applying for encryption licenses.

Other countries are also continuing to focus on the Terra incident and its implications for cryptocurrency regulation. Japan, for example, has stepped up oversight of cryptocurrency exchanges and platforms, requiring them to report suspicious transactions and strengthen cybersecurity measures. India has proposed passing a bill banning all private cryptocurrencies, except those issued by the central bank. The European Union recently adopted comprehensive cryptoasset regulations dubbed Markets in Cryptoassets (MiCA), aimed at making rules more consistent across member states and ensuring consumer protection and financial stability.

In conclusion, the events of Terra highlight the need for more effective and coordinated regulation of cryptoassets, especially algorithmic stablecoins, which pose significant challenges to consumer protection and financial stability. Different countries have different approaches and priorities when it comes to cryptocurrency regulation, and global dialogue and collaboration among regulators, policymakers, industry players, and civil society is critical to fostering innovation and trust in the crypto space.