$40 Billion Implosion - Weekly Crypto Wraps
This week will go down in the crypto history books as one of the most chaotic weeks.
Over the last few weeks, the markets have shown weakness, bearish conditions were evident. This week we saw violent crashes all across the board. BTC reached as low as $26k, ETH reached as low as $1700, and some alts were down 60%-90%. But, it was Luna & UST that stole the show. Luna crashed from $114 to $0.0003 within a couple days and UST lost its peg from $1 going as low as $0.01. The marketcap went from around $45B to $200M within those few days. Aside from this, there were other events that simultaneously took place but got overshadowed, so let’s get into it.
The LUNA Debacle
For those who don’t know, Terra is a layer 1 blockchain that has the native token LUNA. The primary purpose of LUNA is to help maintain the peg of the algorithmic stablecoin UST. The mechanism works like this, to mint 1 UST, $1 worth of LUNA will be burnt, to burn 1 UST, $1 worth of LUNA will be minted. If UST breaks above peg more LUNA will be burned and more UST will be minted to increase supply & decrease demand bringing the peg back down to $1. If it breaks below peg then more LUNA will be minted and UST will be burnt to decrease supply and increase demand thereby brining the peg back up to $1.
Algorithmic stablecoins or algo-stables have a negative rep within the crypto industry for a justifiable reason. All of them have fallen victim to the so-called death-spiral where a major depeg causes a liquidation cascade and the algo-stable reaches $0. A design like UST is dependent on consistent demand being present for UST, as soon as demand dissipates and liquidity starts to thin out, there will be a major depeg leading to a liquidation cascade. This is exactly what happened.
The main selling point of UST was the 20% APY a user would get for depositing their UST in Anchor Protocol. For anyone from a traditional finance background, this may seem absurdly high. But, Anchor managed to sustain this payout for some time. Eventually the reserves started depleting and the APY either had to gradually decrease or there had to be a new source of demand to maintain the peg. TerraForm Labs (TFL) decided to create the LUNA Foundation Guard (LFG). The purpose of LFG was to raise money to buy BTC & AVAX as reserve assets for UST. They bought upwards of $3B worth of BTC & $100M worth of Avalanche. The move was to primarily instill confidence in UST holders that UST is backed by the most resilient crypto asset till date.
However, this did not work out.
The collapse started on Curve Finance. There was initially an $85M sell of UST which caused a momentary depeg but this was defended by some entities that were backing Terra. They sold ETH in chunks to defend the peg. After the peg restored, there was continued selling of UST from Curve in $300k increments. To defend this, there was a $250M buy. The buy helped but it did not restore the peg. After this, there was more selling from big funds as well as retail participants. At this point LFG started burning through their BTC reserves to defend the peg. They eventually ended up selling around $3B worth of BTC to defend the peg and while it temporarily helped, it did not bring UST back to $1. Now Terra, LFG, and the entities backing Terra ended up holding a ton of negative debt in the form of UST. With the reserves emptied out, the death spiral began and there was a liquidation cascade on anchor and the price for UST and LUNA had a meteoric collapse. The selling pressure they put on BTC which drove BTC prices lower caused further market wide panic and major drawdowns across the board.
Many retail participants were badly hurt by this and some major funds such as Jump, 3AC, Galaxy digital, Binance labs and Arca just to name a few took major hits on their portfolios. There were many accusations over it being a coordinated attack by some bigger players which have not been confirmed and recently there arose an issue about $1B worth of BTC from LFG being unaccounted for. The time of LUNA & UST may potentially be done but the story is not over just yet.
Azuki founder controversy
Azuki is a famous NFT project which consists of 10K trendy looking samurai/ninja art pieces. It became a very popular NFT project reaching a floor price upwards of 25ETH at one point. This week, the founder of Azuki who goes by the name Zagabond either unintentionally or intentionally exposed himself by stating that he was the founder of 3 previous NFT projects which were either abandoned or rugged.
He wrote a blog post with the intention of highlighting his journey as a builder in the NFT space. In this post he revealed that he was also the founder of CryptoPhunks, Tendies, & CryptoZunks. All 3 of these projects are now abandoned. He made each of these projects under different alias’ and according to popular on-chain detective ZachXBT, they would classify as rugpulls. After this there was major uproar in the community about the morality and ethics of the founder and this drove the floor price of Azukis to below 5ETH. The price has now made a decent recovery off the bottom after the founder made some reassurances to the community in the discord.
Despite the adversarial market conditions, we continue to see multi-million dollar raises take place within the crypto space.
Dapper Labs is a very successful NFT company. They are behind projects such as NBA topshots, UFC strike, cryptokitties, and NFL all day. They are also the company that built the NFT focused blockchain Flow. Recently they announced a $725M raise from venture firms such as A16z, Spartan Group, Union Square Ventures, Digital Currency Group, Dapper ventures, and more. The purpose of this raise is to use the $725M as an ecosystem fund. The ecosystem fund will be used to attract developers to help build out an ecosystem of gaming, infrastructure, DeFi, NFTs, and general content creation on the Flow blockchain. Seeing the success of their previous ventures, it will be interesting to see how Dapper labs fairs with the Flow blockchain.
Chainalysis is a company that provides data, software, services, and research about different blockchains to government agencies, banking institutions, insurance companies, and cybersecurity companies. Recently they had an investment round led by GIC where they raised $170M at an $8.6B valuation. The purpose of this raise was to expand the team amidst weak market conditions allowing them to continue to provide the important services they do to the players in the traditional world.
Kucoin is a very popular centralized exchange that is used by many crypto participants. This week they announced a raise of $150M at a $10B valuation in a round led by Jump Crypto. The purpose of this raise is to broaden their horizon of the services they offer within the crypto landscape. They want to move beyond just being a centralized trading service. They want to create crypto wallets, as well as NFT, DeFi, and GameFi platforms. This marks another centralized exchange trying to broaden their horizon in terms of the services offered within the crypto landscape. It will be interesting to see how they fair against their competitors.
This is all for this week’s newsletter covering the biggest events in crypto for the week. It was another eventful but chaotic week where the markets are starting to look even more bearish. Regardless of the market conditions, we will still be here, so tune in next week for another edition of this newsletter covering the biggest events in crypto.