The editorial staff of GetBlock Magazine collected the most important news after the collapse of the LUNA token and UST stablecoin

How the Terra ecosystem collapsed. Full timeline of events



15 min

May 25

According to the developers' blog, Terra 2.0 will launch on May 27. The “pre-attack” snapshot is considered May 7, 2022, and there will also be a snapshot before the launch of the new network. Based on these two snapshots, a drop of new tokens will be conducted.When Terra 2.0 is created, the old blockchain will be called Terra Classic (LUNC), and the old LUNA ticker will be transferred to the new token. The initial number of free LUNA tokens will be increased from 15% to 30%. Among the “pre-attack” LUNC holders, 35% will be distributed, while the “post-attack” asset holders will receive 10%. “Pre-” and “post-attack” UST holders will receive 10% and 15% of the new tokens, respectively.

The LUNA distribution to TerraUST holders who put their assets on Anchor (aUST) during the ecosystem crash will be reduced from 20% to 15%. Initially, 30% of funds will be unlocked during the launch, and the remaining 70% will be distributed over the course of two years.

The Financial Supervisory Service (FSS) of South Korea will conduct an on-site audit of Terraform Labs and financial services related to the TerraUSD (UST) stablecoin and its backing token LUNA. The FSS also said it intends to bring in a third-party organization to enhance monitoring of the cryptocurrency market. The regulator plans to introduce a classification of digital assets by types of risks and analyze the “unfair” operating conditions of local cryptocurrency exchanges.

At an emergency meeting of the National Assembly on Tuesday, May 24, the FSS said that the main purpose of the audit is to prevent the damage from the rate collapse of UST and LUNA from spilling into the financial markets. According to reports from the South Korean regulator, investors lost significant amounts of their savings as a result of the loss of the UST stablecoin peg to the US dollar.

May 24

Terra representatives revealed that the proposal to revive the ecosystem does not involve a hard fork. Instead, a new Terra 2.0 (LUNA) blockchain will be created, with no shared history with the old Terra Classic (LUNC) network. If the proposal is approved, assets and decentralized applications (dApps) will need to be migrated to the new blockchain.

If proposal 1623, tabled by Terraform Labs CEO Do Kwon, is approved, a genesis blockchain will be created for the new network. It is noted that the most popular dApps operating on Terra are already ready to be migrated to the new blockchain, among them Prism, Stader, RandomEarth, and OnePlanet. However, the proposal states that, due to technical limitations, all assets in TerraUSD (UST) stablecoins and LUNA tokens will not be able to be included in the new network.

As of May 24, 65,78% of validators supported the revival plan. A total of 284,47 million users participated in the vote.

May 23

Terraform Labs CEO Do Kwon called the burning of LUNA tokens a bad idea. In his view, it will not restore the Terra ecosystem, furthermore, the holders will lose their assets. Despite this statement, the Terra CEO provided a wallet address for the burn of LUNA coins.

The Seoul Metropolitan Police Department asked the local exchanges to block the possibility of any corporate funds being withdrawn by the non-profit organization Luna Foundation Guard (LFG).

According to the law enforcers, evidence was found that pointed to the embezzlement of investors’ funds by the LFG. The appeal to the exchanges to freeze assets was designed to prevent their further use. Under South Korean law, the platforms are not obliged to comply with this request.

May 21

Bitcoin Foundation chairman and Tether co-founder Brock Pierce said that the collapse of the Terra ecosystem did not negatively impact the crypto market, even though the project gained significant scale in a short period of time. Pierce cited the main problem as the fact that people trusted Terra early. He also warned investors against putting too much trust in other new projects.

May 20

Terraform Labs CEO Do Kwon made amendments to his Terra blockchain recovery proposal in an on-chain vote. The first change aimed to reduce the distribution of LUNA (LUNA) 2.0 tokens to TerraUSD (UST) stablecoin holders who put their tokens on Anchor when the asset's value collapsed. Their distribution share was reduced from 20% to 15%.

Kwon then proposed increasing the initial number of free LUNA 2.0 tokens from 15% to 30%, with the remaining 70% locked in for a two-year period. Previously, the ratio was 15% and 85%, respectively. Terra FatMan, an anonymous analyst, stressed that changes to the proposal would have to be accompanied by a new vote.

Terraform Labs CEO Do Kwon applied to liquidate the company’s headquarters in Busan and offices in Seoul on April 30, days before the network collapsed. On May 4 and 6, the application was approved by authorities, after which Terraform Labs ceased its legal existence in South Korea.

After that, Do Kwon attempted to relocate the company to Singapore, but he failed to get the necessary licenses in time. The local regulator suspended the issuance of documents because of Terra’s collapse.

The CEO of cryptocurrency exchange Binance, Changpeng Zhao, said that the collapse of the Terra ecosystem could have been avoided. According to him, the project team should have used its reserves to do so when the UST stablecoin rate deviated from the US dollar by 5%. Zhao noted that when the value of the coins had already fallen by 99%, the company tried to use $3 billion to restore the peg, but it no longer worked.

According to Zhao, the consequences of Terra’s collapse continue to be felt by many other projects throughout the crypto ecosystem.

May 19

The Group of Seven (G7) countries called to accelerate the “development and implementation of consistent cryptocurrency regulation” following the collapse of the Terra (LUNA) ecosystem. The G7 appealed to the Financial Stability Board (FSB), which was responsible for drafting the document. French Central Bank governor François Villrois de Galleau at a meeting of G7 leaders said:

“What happened in the recent past is a wake-up call for the urgent need for global regulation.”

He added that these issues would be discussed at the further G7 meetings. The group consists of the UK, Germany, Italy, Canada, France, Japan, and the US.

One of Terra's prominent backers is the South Korean venture capital fund Hashed, which lost $3,5 billion in unrealized profits due to the collapse of the TerraUSD (UST) stablecoin and its collateral LUNA token. The fund participated in Terra's 2021 funding round, in which it helped raise $25 million (according to Crunchbase). The fund did not comment on the situation around LUNA and UST. Hashed added LUNA's $49,9 million to the stake.

Research firm Delphi Digital admitted that in the first quarter of 2021, their venture capital fund bought a small number of LUNA tokens worth 0,5% of net asset value (NAV) at the time. That position grew as LUNA's value increased, and the fund built up its assets, including a $10 million investment in Luna Foundation Guard (LFG), a nonprofit created to support the Terra ecosystem, in February 2022. Delphi officials said the company is incurring “large unrealized losses.”

Avalanche blockchain representatives recalled that LFG has 1.97 million AVAX tokens in reserves, which are now locked up for a year. That's 0,9% of AVAX's weekly trading volume. These tokens were purchased to secure the UST stablecoin. All things considered, if LFG was suddenly going to sell AVAX tokens, the platform would be willing to discuss with them a strategy to sell that volume.

South Korea reconstituted a specialized investigative organization for financial and securities crimes. The organization is investigating the collapse of Terra as its first case.

The interdepartmental group was created in 2013. It included prosecutors and financial and securities regulators. The team, nicknamed “Yeouido Grim Reaper,” made 346 arrests in 965 cases, mostly involving market manipulation.

The “reapers” were disbanded in January 2020. The team was partially revived in September 2021. However, it did not have the power to investigate, only to facilitate cooperation between prosecutors and financial authorities.

May 18

Terraform Labs’ in-house lawyers began to leave the company. According to profiles on LinkedIn, Terra’s general counsel Marc Goldich, chief litigation and regulatory counsel Noah Axler, and chief corporate counsel Lawrence Florio left in May 2022. Concerned Twitter users were calling for Terraform Labs co-founder Do Kwon to be sued.

Galaxy Digital CEO Mike Novogratz said that the global macroeconomic situation was the cause of the collapse of the UST and LUNA rates. He added that the collapse of Terra “dented confidence in crypto and DeFi.” The entrepreneur said that Galaxy invested $ 400 million in Terra because of “solid fundamentals.” Back in January 2022, the head of Galaxy Digital tattooed himself with LUNA after his company invested in the project. In his statement, Novogratz writes that his tattoo “will be a constant reminder that venture investing requires humility.”

South Korea’s Tax Service accused Do Kwon and the company he founded, Terraform Labs, of evading more than 100 billion won ($78,4 million) in income and corporate taxes.

The Near Foundation, a nonprofit organization, urged app developers in the Terra ecosystem to join its team.

May 17

The South Korean authorities called for a parliamentary hearing on the collapse of the UST exchange rate. A representative from South Korea’s ruling People Power Party Yoon Chan-Hyun said that Do Kwon should speak to parliament and explain the reasons behind what happened. According to Yoon Chan-Hyun, the behavior of crypto exchanges during the collapse of the stablecoin rate also raises many questions. He stressed that while the meeting is postponed, investor losses continue to mount.

90% of the Terra community members opposed the proposal of Terraform Labs CEO Do Kwon to conduct a hard fork of the network in a preliminary vote. Also in the comments, many supported the plan to burn the blockchain’s native token LUNA. The user who posted the poll noted that finding out the community’s opinion as soon as possible would allow not “wasting days.”

Binance offered projects built on the Terra blockchain to migrate to the BNB Chain.

May 16

Polygon Studios CEO Ryan Wyatt reported on Twitter that his team was working closely with developers of projects on the Terra blockchain to help them migrate to the new ecosystem. Meanwhile, some projects on the affected network already shut down their protocols, these include Kujira, Stader Labs, LunaBulls, LunarFlip, and Hero NFT. Polygon was also joined by the Juno Network (JUNO), a smart contract network. The protocol’s representatives offered to allocate 1 million JUNO tokens ($8,3 million, according to Binance) to developers of projects on Terra to migrate to their platform.

Representatives of the Luna Foundation Guard (LFG) confirmed the sale of $2,3 billion worth of bitcoins to support the UST stablecoin. There are 313 BTC, 39 914 BNB, 1,9 million AVAX, 1,8 billion UST, and 222,7 million LUNA (of which 221 million are currently staked) left in the organization’s reserve. The LFG representatives reported that they hoped to use the remaining assets to compensate UST holders, primarily the smallest ones.

Do Kwon proposed to conduct a hard fork of the network. According to Kwon’s plans, the new chain would not be linked to the TerraUSD (UST) stablecoin, and the old one would continue to exist under the name Terra Classic (LUNC). The initiative is aimed at saving the blockchain ecosystem.

Binance CEO Changpeng Zhao said the exchange lost more than $1,6 billion in unrealized profits from its investments in the Terra (LUNA) token after the collapse of its rate.

May 14

Singapore investors LUNA and UST filed a police report against the CEO of Terraform Labs.

May 13

The Terra blockchain temporarily suspended its operations in order to develop a new recovery plan. Terra’s native token issuance reached 7 trillion. UST stablecoin never managed to regain its peg to the dollar, and the price of LUNA collapsed to almost zero at $0,00002.

The Terra community decided to roll back the network prior to the beginning of the collapse of the TerraUSD (UST) stablecoin rate. The users also suggested removing Terraform Labs, returning the UST collateral, and developing a new mechanism for the LUNA token.

Binance resumed spot trading for LUNA/BUSD and UST/BUSD.

After the upgrade, Terra representatives reported that the blockchain resumed blockchain production. Validators decided to disable on-chain swaps and close IBC channels.

Do Kwon made a proposal to restore the Terra ecosystem. Kwon’s idea involves paying compensations to UST and LUNA holders who were unable or unwilling to sell their assets during this week’s price collapse. He suggested that validators restart the network with 1 billion tokens distributed to LUNA and UST holders, as well as a community pool to fund future development.

VanEck and 21Shares suspended support for their exchange-traded funds (ETPs) on LUNA.

Elliptic analysts published an investigation stating that LFG reserves were withdrawn to cryptocurrency exchanges and then disappeared without a trace the day after the UST and LUNA collapse began.

May 12

Cryptocurrency exchange Binance announced the delisting of COIN-Margin perpetual contracts for Terra’s (LUNA) token. Users were advised to close all open positions before the delisting time to avoid automatic settlement. The platform representatives stressed that they reserved the right to further change the max leverage and margin tiers for LUNA contracts without further notice.

Crypto exchanges Bybit, BitMEX and Phemex joined the delisting of instruments on LUNA.

Terra officials said that the platform would destroy 1 388 233 195 UST to restore the pegging of the stablecoin to the dollar, which represented approximately 11% of the tokens in circulation. The Luna Foundation Guard (LFG) issued 240 million new LUNA tokens to protect the network from “governance attacks,” the company’s representatives said.

British blogger, KSI, reported that he lost $2,8 million on the collapse of the Terra (LUNA) token rate. Despite hyperinflation, the blogger had no plans to sell his assets. He said he would wait for the rate to recover.

On the evening of May 12, the Terra blockchain was reloaded for an upgrade.

May 11

The Terra team began working with the community on restoring the UST peg to the US dollar. There was a proposal to increase the basepool from 50 million to 100 million SDR and decrease its recovery period to 18 blocks. 67,08% of the Terra community voted in favor of the initiative. 325,76 million users took part in the vote.

SDR (Special drawing right) is a reserve asset, which was created by the International Monetary Fund in 1969. The SDR price is determined by the US dollar (41,73%), the euro (30,93%), the Chinese yuan (10,92%), the Japanese yen (8,33%), and the British pound sterling (8,09%).

Korean Bithumb exchange announced the potential delisting of the Terra (LUNA) token.

“Due to the strong fluctuations in the price of the digital asset LUNA because of the volatility of the dollar peg of the algorithmic stablecoin of the Terra project, it is designated as an object of investment warning to protect investors,” the exchange representatives said.

Do Kwon presented a recovery plan for the UST stablecoin. It involved increasing the issuance of the LUNA token. Kwon supported the community's proposal to increase the basepool from 50 million to 100 million SDRs.

May 10

The media reported that LGF was looking to raise another $1 billion to support its UST stablecoin. According to sources, the organization was negotiating with potential investors. On the same day, it became known that LGF sold all of its reserves of BTC (according to analyst company Glassnode).

May 9

On this day, LFG representatives announced that they would allocate $1,5 billion to market makers in BTC and UST to support the UST/USD peg. However, this did not help the stablecoin.

May 8

The UST rate fell to a low of $0,99 and the stablecoin lost its peg to the dollar. At the same time, the value of the LUNA token dropped more than 8%.

On the same day, Terraform Labs CEO Do Kwon explained that the drop in assets’ value was due to the blockchain removing 150 million UST from the Curve Finance DeFi-protocol in preparation to deploy to the 4pool liquidity pool. According to him, the company had initially removed 100 million UST to “lessen the imbalance” of the stablecoin.

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