- TerraUSD (UST), worked as the perfect exit liquidity similar to a prolonged pump and dump scheme.
The team at Arcane Research has released a report on the recent collapse of TerraUSD (UST) and the LUNA token. The informative report kicks off by comparing the Terra ecosystem to a sinking cruise ship, whereby the captain and distinguished guests had fled in superyachts, leaving most passengers behind without lifeboats.
Early Terra (LUNA) Supply Controlled By a Few Holders, Who Sold And Made Tremendous Profits
Furthermore, the report likened the Terra saga to a standard pump-and-dump scheme with the early LUNA supply held by a few holders and TerraForm labs, as highlighted in the chart below courtesy of Arcane Research.
The report further informs that from October 2020 to May 5th, 2022, 3,000 Terra wallet clusters had a net outflow of $6 billion worth of LUNA to exchanges and through bridges. In contrast, all ‘other hundreds of thousands of wallets have a net inflow of $6.5 billion’ thus indicating a pattern of selling of LUNA by the large holders to retail investors.
UST Provided the Perfect Exit Liquidity Similar to a Prolonged Pump and Dump
With respect to TerraUSD (UST), the team at Arcane Research pointed out that the burn and mint mechanisms surrounding the stablecoin and LUNA, provided ‘ the perfect way to create sustained exit liquidity for their initial endowment of LUNA tokens.’ They added:
" The burn/mint mechanism in the Terra ecosystem was simple.
With certain limitations, you could at any time convert 1 dollar’s worth of LUNA to 1 UST by burning the LUNA, and vice versa.
In theory, if I owned all LUNA tokens, I could drive up prices on the exchanges by buying my own tokens, then mint a great amount of UST while at the same time reducing the LUNA supply through the burn/mint mechanism."
Consequently, LUNA’s rise in value in the fall of 2021 made it possible for the large holders to convert their tokens into great amounts of UST. At the same time, the 20% yield guaranteed by the Anchor protocol and reserve backing by Terraform Labs, created significant demand for UST making it easy for the large LUNA holders to cash out by minting UST and selling into the Anchor-induced demand for the stablecoin.
The flow of profits into the wallets of early LUNA holders was thus guaranteed as explained below.
" By pumping the LUNA token, the burn/mint mechanism, and creating a sustained demand for the UST token through Anchor, the perfect exit liquidity for large LUNA bags was created.
And the UST exit gates were used at scale for a set of very early LUNA holders. At best, the profits can be described as collateral winnings in a failed bootstrapping attempt."