A 35-year-old programmer was caught in a death spiral in the cryptocurrency circle, and his tens of millions of assets were reduced to zero in three days.

The account had assets worth nearly 10 million yuan at its peak, but they were almost reduced to zero in just three days.

Guo Rui, a 35-year-old programmer, spent the darkest week of his life. He took a week off from work, could not sleep every day, and could only eat a little food under the pressure of his wife. He kept staring at the messages on his phone, hoping to see a hint of the increase in the Luna tokens he bought, but the data fell below his expectations again and again - $50, $20, $1, $0.00000112...

This star digital currency, which once ranked fourth in the cryptocurrency market, once achieved the wealth dreams of countless people with a hundredfold increase in 2021, and in just a few days, it caused the numbers in countless accounts to evaporate. Of course, there is hope in the huge crisis. Some people also made huge sums of money in this crash by shorting with leverage, moving bricks on various exchanges and chains, or successfully buying at the bottom.

Along with Luna, the algorithmic stablecoin UST also plummeted. It is the nested model of Luna and UST that ensures the balance of supply and demand between the two, so that UST, which has no assets as collateral, is stable at a price of 1 US dollar. On May 8, a large amount of UST was premeditatedly sold, the balance was broken, UST was decoupled from the US dollar, and many people used UST to exchange Luna, which caused Luna to plummet. Under the influence of panic, people sold their Luna and UST, and a death spiral occurred. The price of UST, a stablecoin anchored to 1 US dollar, once reached a minimum of 0.03 US dollars, and the lowest price of Luna reached 0.00000112 US dollars.

On the evening of May 25, the Terra blockchain ecosystem behind Luna and UST announced on Twitter that developers have voted to create a new blockchain and issue new Luna coins. The new coins will be distributed to existing Luna and UST holders on May 27. On May 28, Luna 2.0 was officially launched, but people's confidence in it was difficult to rebuild.

The "perfect" project

This is an innovation, and few people in the cryptocurrency circle would refute this view. UST and Luna are both tokens issued on the Terra public chain, but Terra is more than just a public chain. Many products have been derived around this public chain. Terra is a blockchain, a bank, a payment processing agency, etc. This blockchain project, co-founded by 30-year-old Korean Do Kwon, was once described by some insiders as "will change the mainstream financial industry."

Do Kwon, founder of Terra

Guo Rui, who is proficient in computer algorithms and has done system construction and maintenance for a blockchain project, was impressed by the various projects in the Terra ecosystem. He first came into contact with Terra at the end of 2020. At that time, a project called mirror in the Terra ecosystem that made synthetic assets of US stocks was launched.

“Whether it is the design of the economic model, the various incentive methods of the project or the community governance, this project is perfect.” Although his assets have been reduced to zero, when talking about the Terra project, Guo Rui still reveals his sincere admiration.

In Terra's ecosystem, each project is closely linked. The synthetic assets of US stocks in the mirror require the use of the stablecoin UST issued by it. The better the mirror develops, the more UST will be used. The algorithmic stablecoin UST is the cornerstone of the Terra ecosystem. The Terra ecosystem is thriving, and many excellent developers are building their own blockchain projects on the Terra public chain. Guo Rui is one of the supporters of the Terra ecosystem.

UST and Luna have a symbiotic relationship. Under the rules designed by founder Do Kwon, UST can always be exchanged for Luna worth $1, and UST and Luna maintain a two-way destruction and minting relationship. Guo Rui keenly realized that because the Terra ecosystem is developing steadily and positively, people's demand for UST is increasing, and the price of Luna will also get higher and higher.

Guo Rui made three times the money on the mirror project. He took out the money and invested it all in Luna. At that time, it was February 2021, and the price of Luna was about $2 per coin. Out of trust in Terra, Guo Rui will continue to increase his position in Luna below $20.

Guo Rui's judgment seems to be correct - Luna's price reached a peak of $119 this year, with a market value of $41 billion. According to data on May 27, the market value of Baidu, a well-known Internet company in my country, was only $47 billion.

Another project that has attracted countless investors is a project called Anchor launched by the Terra project. This project is equivalent to a bank that provides UST deposit and loan services. It will provide depositors with an annualized interest rate of up to 20%, attracting many investors to purchase UST and deposit it in the Anchor project to earn high interest. The 25-year-old bounty hunter is one of them. At the end of 2021, the cryptocurrency market turned bearish, and he deposited $80,000 in UST in order to make high profits. In his opinion, depositing money in Anchor is one of the few ways to make money in a bear market.

Changes in anchor's earnings

In fact, he had sensed the "Ponzi scheme" flavor of this project from the beginning. When he deposited UST, he told himself that if there was any disturbance later, he would withdraw the money immediately.

Under the seemingly stable high profits, there are high risks that cannot withstand scrutiny. A large amount of UST is used for financial management in the Anchor project and is not circulated in the market. Due to the arrival of the bear market, the income of the Anchor project's lending business is not good, so it is unable to achieve the promised 20% interest rate return through its own blood-making. In order to maintain the operation of Anchor, the Terra project's foundation can only use reserve funds to fill the interest gap. However, the huge interest gap is a big hole that cannot be filled. It is reported that by June this year, the reserve funds will be exhausted.

The collapse started from the Anchor project. When the bear market came, people realized that Anchor could no longer support high interest rates. First, large institutions sold UST on a large scale, causing panic among retail investors. People began to exchange UST for Luna, which caused a surge in Luna in the market and a sharp drop in Luna's price.

Fatal "flaw"

On May 7, the bounty hunter received an early warning. At that time, the price of UST was $0.997. According to the information on the chain, many people were already selling UST. However, he did not withdraw his UST from the Anchor project immediately as planned. At 6:00 a.m. on May 7, Guo Rui also received a call from a friend, who told him that UST had been decoupled. Guo Rui took a look and found that it was only 0.5% decoupled. In his memory, UST had been decoupled from the US dollar four times, but it was smooth in the end.

The most serious one was the big crash in the cryptocurrency market on May 19, 2021. Bitcoin fell 34% on that day, and more altcoins fell even more miserably. The price of UST fell to $0.96 on that day. At that time, Guo Rui had panicked, but because of his belief in the Terra ecosystem, he even bought some UST at the bottom when the panic spread, and then used these "discounted" UST to buy more Luna. This crisis was quickly passed, and UST also resumed its peg to the US dollar.

Afterwards, the bounty hunter reviewed why he did not take action when he sensed the danger. "I just regarded UST as a stablecoin, thinking it was the same as the US dollar, and did not regard it as a risky asset."

But in fact, UST is different from other stablecoins in the blockchain. There is no asset anchor behind it to maintain its price stable at 1 USD. Instead, UST is linked to the highly volatile Luna, and a mechanism is used to achieve a balance between UST and Luna, thereby achieving the stability of UST prices. Under the design of this mechanism, 1UST can always be exchanged for Luna worth 1 USD. That is to say, if the price of 1UST is less than 1 USD, 1UST can be exchanged for more Luna; and when the price of 1UST is higher than 1 USD, the same price of Luna can be exchanged for more UST. With the help of such a mechanism, countless people exchange Luna when 1UST is not equal to 1 USD to achieve arbitrage. And because UST and Luna are in a two-way casting and two-way destruction relationship, when 1UST is exchanged for 1 USD of Luna, the 1UST exchanged will disappear, and vice versa. It is also through people's arbitrage behavior that the balance between the quantity of Luna and UST is maintained, so that the price of UST can be maintained at 1 USD.

But this mechanism has a fatal "flaw" - it will inevitably fall into a death spiral. Guo Rui was deeply impressed by the "519" decoupling event in 2021. Luna was hit by the decline of UST, and its price fell to US$4.10, a 75% drop from the trading price a week ago.

Death spirals have always existed, but market confidence was not completely destroyed in previous decoupling events.

Bounty hunters feel that algorithmic stablecoins are a game of one foot on the other, blowing a big bubble that bursts when touched. When investors lost confidence in Luna, demand for UST also fell. This caused the price of UST to fall below $1, prompting holders to exchange their UST for Luna. At this point, the arbitrage mechanism takes effect, and UST holders effectively mint more Luna when the demand for Luna dries up, which causes the price of Luna to fall further. For UST, its price can remain stable precisely because there is a stable and huge demand for UST in various ecosystems of Terra. In other words, like other cryptocurrencies with huge fluctuations, it is the market liquidity that supports the price of UST.

The economic environment is going down, the bear market is coming, the amount of funds in the investment market is decreasing, and liquidity is declining. If there is a slight disturbance, people will panic and sell Luna or UST, which will inevitably lead to an irreversible death spiral. Bounty Hunter believes that the rapid plunge is also due to the openness and transparency of the blockchain. All flows on the chain are transparent. When risks occur, everyone can see it, which will accelerate the run.

On May 8, Terra withdrew 150 million UST from the fund pool due to a new plan, causing a short-term decline in UST liquidity. At this time, large institutions began a large-scale UST selling plan, and $2 billion of UST flowed out of Anchor that day. As a result, a large amount of UST suddenly appeared in the market, the balance of supply and demand was broken, and the price of UST began to decouple from the US dollar.

It was not until UST decoupled from the anchor to 0.8 that Guo Rui realized the seriousness of the problem. At that time, the Terra project team posted on Twitter that the foundation was preparing a recovery plan. Twitter showed that the project team was negotiating a financing of more than one billion US dollars, and planned to use this money to restore UST anchoring. But later, the financing was not negotiated. The previous 750 million US dollars used by the project team to help UST achieve stability also did not achieve the desired effect.

On May 11, Do Kwon issued an announcement stating that he could not save the market and could only rely on the arbitrage mechanism to help UST restore its price. Guo Rui then realized that the project was over. At that time, his mental state was already very dazed. During the entire decline, Guo Rui actually had the opportunity to escape, but he always believed that Terra could survive this. As a supporter of the Terra ecosystem, he even participated in a campaign to save the Terra ecosystem.

There is a group of people called Lunatics on the Internet. They are die-hard fans of Luna. They will use their UST to buy a large amount of liquidated BLuna (Luna's collateralized derivatives) and hold it without selling it, thereby slowing down the selling pressure of Luna and trying to prevent the death spiral from happening. Guo Rui still has 30,000 UST in his hand, and he took out all of it to participate in this movement.

But such an operation was a drop in the bucket and did not cause any splash. On May 13, many exchanges removed Luna from their shelves and suspended trading, and the Terra public chain was shut down.

Fire chestnuts

During the days when Luna's stock price plummeted, Guo Rui was almost collapsed but also had illusions. He would over-interpret a lot of news, always thinking that there would be an external force or potential solution to solve this crisis.

Seeing the assets in his account shrinking little by little, in order to recover his losses, he took out more than 100,000 yuan that he had already escaped and did some short-term trading. However, Luna's decline was too fast, and all the more than 100,000 yuan that he had finally escaped was lost.

Bounty Hunter also traded on the swing trade under the guidance of emotions, and even leveraged the contract. He made $25,000 on the first day, and lost another $16,000 on the second day. After seeing the nature of the death spiral, he chose to short sell and increased leverage five times. However, Luna was very volatile at that time, and a 20% fluctuation caused him to go bankrupt.

He recalled that in the past few years since he entered the cryptocurrency circle, every time his mentality exploded and he lost money, it was because he had leveraged contracts, and every time he wanted to do contracts when he was emotional, he fell into a vicious circle. On May 10, he spent another 10,000 yuan to buy Luna at a low price, and sold it on May 11, with a loss of 80%.

When Luna's plunge has become a major trend, speculators have flocked in to conduct short-term operations, hoping to get a piece of the pie in this major trend.

Lu Ming is also one of the people who leverage contracts. He works in a blockchain media company and is well-informed about the news in the industry. On May 11, he saw Luna plummeting, so he bought 20,000 US dollars of Luna at the price of 20 US dollars per Luna. He decided to short after seeing the proposal given by the founding team to save UST by issuing more Luna. He judged that with a large number of additional issuances, the price of Luna would definitely fall all the way, so he kept a short order. When Luna fell to 0.2 US dollars, he judged that there should be a wave of price rebound, so he opened a long order again, but Luna did not rebound as he expected, but continued to plummet. Lu Ming's position was liquidated.

Recalling his leverage operation, Lu Ming said he was in a panic. During the entire operation, he would often pay attention to various news, imagining that an external force would turn the tide and save Luna. However, this force never appeared. At the lowest point, Luna fell to $0.00000112, almost zero.

"This may be the biggest money-making opportunity in the cryptocurrency world this year." The bounty hunter said that wealth is conserved. When someone loses money, someone else makes money. Leveraging contracts is to make money from the counterparty. At this moment, the short sellers lose money, and the corresponding long sellers will make money. The "80/20 rule" still applies in the cryptocurrency world. The losers are "80" and the earners are "20".

Tsubasa Ohzora, 27, is one of the people who made money in this crash. He runs a wholesale women's clothing business at a stall in Shisanhang, Guangzhou. On May 10, he read the news of UST's de-anchoring on his WeChat Moments.

He quickly checked the issuance of Luna on the chain and saw that Luna had been increasing its issuance. He determined that Luna would definitely plummet. He took the money to short and placed a double short order, always adopting the rolling position mode, and finally made 40,000 US dollars.

The main reference standard for Ohzora Tsubasa to conduct contract operations is the information on the chain, and he does not pay much attention to the news.

On May 12, he found that the price of Luna on Binance and Euro-Italian exchanges was at a premium, with a profit of about ten times, so he decisively rushed into Binance to buy Luna and then withdrew the coins to Euro-Italian Exchange, hoping to earn the tenfold difference. However, the recharge on the chain was in place, but the exchange account did not show the recharge arrival. After asking a friend for help, he waited for three hours before the recharge was transferred to the exchange account, but at this time the premium had disappeared.

Left: The money Ozora Tsubasa made from short selling Right: Ozora Tsubasa trading

On May 13, the premiums of the two exchanges still existed, reaching a thousand times at the highest. On that day, the lowest price of Binance was 0.0000012 US dollars, while the price of EURUSD was 0.0079 US dollars. Because of the experience of being stuck in the exchange the day before, Tsubasa Ozora did not participate in arbitrage again. But because of this huge price difference, many of Tsubasa Ozora's friends made money on that day. A friend he knew made 2 million yuan by arbitrage. In the community, there is also a screenshot of a transaction in which a person made 25 million yuan with 2,000 US dollars.

On May 14, Do Kwon tweeted that he had not sold any Luna, and the team was sorting out the reserves and usage, and preparing new proposals to help Luna rebuild. Luna soared more than 1,000 times from the bottom. Ozora Tsubasa also successfully bought the bottom when the market sentiment was high, earning three times the spot.

The myth of getting rich by shorting, buying at the bottom, and moving bricks in various exchanges to earn the difference has once again spread in the cryptocurrency circle. "I missed out on 600 times." Ozora Tsubasa regretted that he was lazy and did not participate in moving bricks to earn the difference on May 13.

Can faith be restored?

On May 24, the proposal issued by Terra Builder Alliance to "rename the existing network to Terra Classic and rebuild a new chain Terra without algorithmic stablecoins" was passed. This indicates that Luna will allocate a new chain, and the old Luna will be abandoned by the project.

Users who originally held Luna will be airdropped new tokens Luna. In Guo Rui's view, the rapid restart of Terra 2.0 is inevitable because it is necessary to take care of the interests of old shareholders and repay debts through debt-to-equity swaps. In his view, this result was destined to happen when Do Kwon ran out of reserves and decided to use liquidity to solve debts.

On May 28, the new Luna was launched. In a community of 500 old Luna holders, people began to discuss how they would quickly sell the new Luna after receiving the new Luna airdrop. People had lost confidence in the Terra ecosystem.

According to SBS News, the Korean Financial and Securities Crime Joint Investigation Team has officially launched an investigation into Terra, including Terra co-founder Do Kwon and other core members of the Terra team. According to Yonhap News Agency, the Korean prosecutors are studying whether to prosecute Do Kwon for "Ponzi scheme" related charges. Luna investors in South Korea have jointly filed a lawsuit against Do Kwon for suspected fraud and illegal fundraising, and asked the court to seize his assets.

Do Kwon, co-founder of Terra

Guo Rui reviewed the failed investment. He felt that he underestimated the systemic risk and lacked the keen awareness of news and market sentiment that some traders have. He also failed to escape in time because he trusted the Terra ecosystem too much.

After his assets were reduced to zero, Guo Rui was disappointed with the performance of LFG, the foundation behind the Terra project, and Do Kwon, the founder, but he did not think that the founding team intentionally caused the crash. "The founder and the team did not run away with the money and were actively trying to save the market. It's just that the project failed." Before the crash, everything in the Terra ecosystem was thriving. Originally, Terra's payment project was going to be launched in May.

The CEO of FTX Exchange commented that if the project had sufficient plans, Terra might be able to survive this crisis. However, bounty hunters believe that perhaps algorithmic stablecoins themselves are a false proposition. Many algorithmic stablecoin projects have failed before, and in the traditional financial field, there is no good solution to the death spiral problem.

This failure made Guo Rui understand the meaning of "Ponzi scheme" more deeply. He believes that most blockchain projects use Ponzi schemes, which can only be used as a growth tool for a short time, and ultimately need to find a non-Ponzi stable profit model. Terra failed to find it.

During the decline of Luna, many friends of blockchain media practitioner Gong Xiaoyu spent a small amount of money to buy Luna, "spending a few hundred dollars for fun." The collapse of the star coin that once ranked among the top ten in the cryptocurrency market is considered by some insiders to be a major event worth remembering.

It was also because of the plunge that Luna went viral. It rose nearly a thousand times from the bottom to the highest point. Countless people who successfully bought the bottom made a lot of money. Many investors outside the cryptocurrency circle began to ask on Weibo how to buy Luna. Under the influence of her friends, Li Shizha, a newbie in the cryptocurrency circle, spent $80 to buy more than 200,000 Luna at a price of $0.00037 each at the peak. After buying it, she also began to fantasize, "If this coin rises back to $120 per coin, how much money will it be?"

When the latest proposal passes the community referendum, the former Luna will be renamed Lunc and handed over to the community for management. When Li Shizha saw this news, she suddenly realized that the old Luna would no longer have the possibility of rising. "How could it rise again? Even if the banker wanted to control the market and cut the leeks, he would not choose this kind of currency that has so many people trapped on the top. If the market rises a little, someone will sell it, and the price can't be pulled up." At this time, the price of the Luna that Li Shizha bought had been cut in half.

When rationality returns, the bubble of wealth creation is instantly burst.

(Except Do Kwon, all characters in this article are pseudonyms)