LUNA crash could’ve been avoided?

LUNA and UST crash took crypto by storm last week. What happened? Would a DAO help?

How UST and LUNA work

UST is an algorithmic stablecoin, meaning that it:

  1. Is meant to be worth around $1.
  2. Is kept around $1 by an algorithmic method, effectively by manipulating supply and demand.

Specifically, holders of UST could buy $1 worth of LUNA with each UST, thus creating demand for UST any time it went far enough below $1 to justify the trading fees of buying and converting it to LUNA.

What happened

UST was attacked by a malicious actor not as a hack but as pure market manipulation. There are several theories but most agree that the attacked included borrowing UST in order to crash its price and repay it back at a much lower price. Without getting into too many details, the price of UST dropped to under 14 cents. The price of LUNA dropped to $0.000008298171 (not a typo) after a one-time-high of $119. Why? Because at some point, the FUD on UST caused it to flip market caps with LUNA, meaning that there wouldn’t be enough LUNA to cash your UST into if everybody wanted to do so = panic!

How is it being fixed

LFG, the foundation behind both LUNA and UST tried to prop UST up however they could, including dumping BTC from their reserves. So far… it failed spectacularly. They claim to have a plan. And UST did bounce back up a bit but nowhere near peg.

How could it happen in the first place?

The attack started after LFG took part of the liquidity from Curve, the attacker had to do much less manipulation (aka, invest much less money into it). So the timing was right.

At the same time, most of UST was parked on Anchor, the UST-centric staking protocol where UST yield was around 20% (incentivized by LFG). Once the panic started, UST stakers on Anchor dumped it without mercy.

What if it was a real DAO?

Now imagine if LUNA and UST were run by a true DAO. Would the holders approve such a heavily incentivized (aka, not sustainable) staking on Anchor? Would they see the danger of pulling liquidity from Curve without having it elsewhere? Would they have better mechanisms for UST not to depeg and for LUNA to hold its value? It’s hard to tell definitely “yes” about all of these, but it’s very likely a “yes” for at least one.

Properly decentralized and incentivized governance is the way you avoid shortsighted decisions. It’s also in the full spirit of crypto. That’s why DeXe is committed to the DAO principles and encourages others to follow suit. Keep an eye out for news, DeXe Investment release is just around the corner.

Stay tuned!

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