Experts told whether it is worth considering the second version of LUNA for investment, and what risks are associated with the events surrounding the new network

Problems, secrets, and lawsuits. How to make money on Terra's relaunch

04.07.2022

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7 min

It's been almost two months since the collapse of the Terra ecosystem due to the loss of the UST algorithmic stablecoin's peg to the dollar and the collapse of the LUNA token securing it. On May 28, CEO of Terraform Labs (TFL) Do Kwon announced the launch of an upgraded blockchain, Terra 2.0.

Soon Binance, the largest cryptocurrency exchange by trading volume, listed the new LUNA token. Trading started at $1, two days later the asset's exchange rate peaked at $25. As of July 4, 12:50 UTC, the asset is trading at $2,16, down 92% from its all-time high (ATH).

Relaunch, hidden accounts, and manipulations

Terra 2.0's relaunch didn't solve the company's problems. Shortly after the network launch, one blockchain validator, nicknamed THORmaximalist, posted community chat logs, which consisted of developers, including Do Kwon, as well as most of the major validators.

In the chat room, discussions about the relaunch began on May 12. Confusion and doubts about this decision prevailed among the chat participants. After the launch of Terra 2.0, problems also arose: the price oracle worked with errors, and the number of LUNA tokens issued during the distribution was calculated incorrectly.

After the airdrop among LUNA holders of the first version and the listing of the new coin on exchanges, an analyst from the Terra community under the nickname FatMan accused TFL of fraud during the distribution of coins. According to him, the company received 42 million LUNA for a total of about $200 million. In his accusations, FatMan referred to the company's May 25 statement, which said that TFL addresses would not participate in the distribution in order to put the network under community management.

Three TFL-affiliated addresses were discovered, and two more linked to Kwon personally. According to the analyst, there were other secret wallets. FatMan suggested that Kwon was going to use these coins to manipulate the community. Earlier, he also shared information from a “verified insider” that Kwon was working on a new algorithmic stablecoin on the Terra 2.0 blockchain.

Later, a joint investigation by CoinDesk Korea and analytics firm Uppsala Security revealed that TFL had about $3,6 billion in UST stablecoins and fiat currency in hidden accounts. Experts believe that with these funds, Do Kwon and his company could manipulate the price of their assets and cause an artificial collapse of the ecosystem.

Binance also initiated an internal investigation. The exchange's CEO Changpeng Zhao instructed the investigation team to look into FatMan's other allegations that TFL and Do Kwon personally manipulated LUNA and UST prices as well as engaged in insider trading.

Zhao himself believes that Terra's collapse was “a disaster. It’s not good for anybody.” In his view, mistakes were made in the design of UST and the blockchain itself. Zhao also disagreed with the methods used to relaunch the new network.

Eugene Khashin, co-founder of the cryptocurrency bank card company Embily, expressed a different opinion:

“Terra faced unrealistic pressure, and, in my opinion, the anti-crisis council did everything right — from stopping the network to redistributing liquidity. Of course, this could have been avoided, but DAI (stablecoin on the Ethereum network) also went through hacks a few years ago and only got stronger, which I think is what Terra is repeating.”

Also in the South Korean edition of KBS New, there was an article about TFL laundering $4,8 million through a shell firm in Seoul that was allegedly engaged in blockchain technology consulting. The National Tax Service noted that TFL transferred funds to a certain “Company K”, recording the transactions as “other expenses.” One Terra developer told the publication that the shell company was operated on behalf of TFL and was affiliated with Do Kwon.

Authorities vs. TerraForm Labs

The case was not limited to insiders and accusations: law enforcement authorities in South Korea and other countries were interested in the collapse of Do Kwon's ecosystem. In late May, the South Korean prosecutor's office launched an investigation into TFL's founder and other employees. Several of them were banned from leaving the country.

Law enforcement officials said that a number of project participants expressed some doubts about the “launching Luna and Terra because the pilot model failed within the company at the time”. Prosecutors are investigating whether Kwon actually manipulated prices and whether the company's assets were properly verified when they were listed on exchanges.

Following the incident, local lawmakers called on cryptocurrency exchanges to come up with a unified set of asset listing and delisting rules to protect investors' funds.

The Securities and Exchange Commission (SEC) also took an interest in the head of TFL. The regulator believes that Do Kwon may have been involved in unlisted securities trading through the Mirror Protocol on the Terra blockchain. Through it, users traded tokenized shares of major US companies, such as Amazon or Apple.

The SEC noted that Kwon promoted the platform to customers in the United States. The head of TFL appealed the regulator's decisions twice, but the court dismissed all appeals, citing the fact that 15% of Mirror Protocol's users were in the United States.

“The investigation around the Terra collapse is clearly not being conducted in one country, but in several at once. Sooner or later, American justice will openly bring charges against Do Kwon, but first the evidence base is meticulously collected,” explained Roman Nekrasov, co-founder of ENCRY Foundation, a decentralized technology development company.

In June, Do Kwon was sued collectively in the US District Court in Northern California. He is accused of selling unregistered securities as well as making false statements about the stability of UST and LUNA. The plaintiffs include cryptocurrency hedge fund Three Arrows Capital (3AC), which eventually filed for bankruptcy, as well as Jump Crypto, Jump Trading, Republic Capital, Republic Maximal, Tribe Capital, DeFinance Capital, DeFinance Technologies and GSR Markets.

Plaintiffs also claim that TFL did not register its assets with the SEC. Do Kwon and his company are being asked for compensation in the amount of the purchase value of the tokens and all legal costs. In another lawsuit, 2 000 Terra retail investors sued Binance.US for using misleading advertising and selling UST as unregistered securities.

The future of the LUNA token

Most experts agree that it is better not to consider this asset as a long-term investment. Roman Nekrasov believes that Terra has a bad reputation due to accusations of market manipulation and unfair project management:

“At any moment, the rate, which went up 70% from the low, can just as easily collapse to 98% and no longer go up. With such initial data I would not consider LUNA as an investment. The risk of losing the money invested is too high, and it doesn't look like an investment — just a regular gambling. You might as well go and play blackjack.”

Also, according to Nekrasov, the collapse of Terra had a negative impact on other crypto-lending platforms, followed by crypto funds. For example, according to The Wall Street Journal piece, many hedge funds began shorting the Tether (USDT) stablecoin, which also temporarily lost its peg to the US dollar.

After a short-term loss of parity with the dollar, USDT's market capitalization began to decline. According to CoinMarketCap, from an ATH of $83,24 billion recorded on May 5, it has fallen by more than $15 billion and is $68,1 billion as of July 4.

“Terra's collapse increased the negative pressure on bitcoin and the crypto market in general. Now even BTC's recovery to $50 000 by the end of the year seems to be a good result,” Nekrasov said.

Nikita Vassev, founder of the international forum on blockchain technology TerraCrypto, believes that LUNA has too bad a reputation for long-term investments, but it is quite an acceptable tool for one-day speculation on the exchange:

“The main thing is to be aware of the high risks that such speculative instruments entail. If you want to tickle your nerves, why not invest a couple of percent of your investment portfolio into this cryptocurrency carousel, if you want to feel the risk.”

According to Vassev, one shouldn't take the asset seriously. And the story with the Terra collapse itself has undermined confidence not only in UST, but also in other stablecoins.

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