What began as a gradual downturn towards the end of 2021 has quickly turned into one of the harshest crypto winters the market has ever seen.
Bitcoin is currently at $20,023 - less than one-third of its November 2021 all-time high. It’s a similar story for Ethereum, which dipped below the $ 1,000 mark over the weekend.
But besides massive investor losses, the last two months have also seen 3 of the worse project failures in the crypto industry. It began with the Terra UST debacle in May, which tipped the markets into a nosedive. And since then, two more firms, crypto exchange Celsius and venture capital firm 3AC, have buckled under market pressures and are inching closer to insolvency.
Let’s take a closer look to see what went wrong with these ill-fated projects and if there is any hope of resuscitation.
On 7th May 2022, Terraform Labs – the firm behind the Terra ecosystem, executed a pre-planned withdrawal of 150 million UST from a decentralised exchange called 3pool. Terraform Labs did this to move their funds to a different protocol. However, the high-volume extraction rendered 3pool low on liquidity and vulnerable to exploitation.
According to Chainalysis, a trader spotted the opportunity exchanged 85 million UST for USD Coins (USDC) within 13 minutes of Terraform’s withdrawal. This was followed by another trader doing the same with 100 million UST in slots of 25 million UST each. This created a massive supply of UST in the crypto market.
While Terraform Labs tried their best to counter these withdrawals, the two traders had already done the damage, and the UST lost its 1:1 peg with the US Dollar.
This caused widespread panic among Terra’s investors. Several investors began exiting their positions on UST with the Anchor Protocol, a decentralised finance (DeFi) project run by Terraform Labs itself. Anchor promised very high yields to UST depositors, which caused them to park 72 percent of all UST in existence with the protocol by mid-April, according to Decrypt. (12.67 billion UST out of 18.74 billion.)
Also, the UST-USD peg was maintained with a reserve of Terra’s native cryptocurrency, LUNA. Therefore, when UST began to plummet, it took the LUNA token with it. LUNA fell from $80 on May 1 to $0.0001 by the end of the month.
Since then, Terra co-founder Kwon Do-hyung has offered several proposals to resurrect the dying project. One of them was a hard fork that would create a whole new version of the blockchain, with coins under the same name. The old network would be renamed Terra Classic and Luna to Luna Classic (LUNAC).
While the new coin has found some traction, trading at $2.03 at the time of writing, it is nowhere near LUNAC’s May high of $87.
The Terra meltdown has also had a ripple effect on Three Arrows Capital (3AC). On June 17, 2022, 3AC conceded to the Wall Street Journal (WSJ) that the LUNA catastrophe had caused heavy losses for the firm.
3AC Co-founder Kyle Davies told the WSJ that the firm had $200 million tied up in LUNA tokens dating back to the $1 billion fundraiser held by the LFG in February 2022. Following the implosion, the $200 million was vaporised. “The Terra-Luna situation caught us very much off guard,” said Davies to the WSJ.
According to The Block, 3AC also owes $6 million to BitMEX – a crypto exchange. In the last week, three exchanges, viz., FTX, BitMEX and Deribit liquidated all positions of 3AC when the hedge fund could not meet margin calls. While sources have told the WSJ that FTX and Deribit have only taken minor bruises, the BitMEX amount is significant.
3AC is looking at selling off assets to raise funds and repay debts while scouting for firms that can possibly resuscitate it. “We are committed to working things out and finding an equitable solution for all our constituents,” Davies told the WSJ.
And finally, on 13th June, the Celsius Network - one of the largest crypto lenders globally, announced that it was totally suspending withdrawals, swaps, and transfers. The move was quite massive as the project was managing assets worth $12 billion in May 2022 for 1.7 million customers worldwide. Investors have still been waiting for the protocol to reveal when or how will their funds be available for redemption.
While the cause is not related to the UST plummet, a series of strategic blunders have caused the protocol to “overheat”, according to a Coindesk report. In 2 separate incidents, Celsius lost $22 million in connection with a BadgerDAO hack and 38,000 ETH when Stakehound (an ETH staking service) lost private keys of wallets.
The Celsius Network cited “extreme market conditions” as the reason behind going cold. “We understand that this news is difficult, but we believe that our decision to pause withdrawals, swaps, and transfers between accounts is the most responsible action we can take to protect our community. We are working with a singular focus: to protect and preserve assets to meet our obligations to customers. Our ultimate objective is stabilising liquidity and restoring withdrawals, Swap, and transfers between accounts as quickly as possible,” read the announcement blog.
The protocol has also sought legal counsel and is exploring ways to resurface unscathed from the explosive situation. The options under consideration are financial restructuring and fund infusion from investors.
Let’s take a closer look to see what went wrong with these ill-fated projects and if there is any hope of resuscitation.
On 7th May 2022, Terraform Labs – the firm behind the Terra ecosystem, executed a pre-planned withdrawal of 150 million UST from a decentralised exchange called 3pool. Terraform Labs did this to move their funds to a different protocol. However, the high-volume extraction rendered 3pool low on liquidity and vulnerable to exploitation.
According to Chainalysis, a trader spotted the opportunity exchanged 85 million UST for USD Coins (USDC) within 13 minutes of Terraform’s withdrawal. This was followed by another trader doing the same with 100 million UST in slots of 25 million UST each. This created a massive supply of UST in the crypto market.
While Terraform Labs tried their best to counter these withdrawals, the two traders had already done the damage, and the UST lost its 1:1 peg with the US Dollar.
This caused widespread panic among Terra’s investors. Several investors began exiting their positions on UST with the Anchor Protocol, a decentralised finance (DeFi) project run by Terraform Labs itself. Anchor promised very high yields to UST depositors, which caused them to park 72 percent of all UST in existence with the protocol by mid-April, according to Decrypt. (12.67 billion UST out of 18.74 billion.)
Also, the UST-USD peg was maintained with a reserve of Terra’s native cryptocurrency, LUNA. Therefore, when UST began to plummet, it took the LUNA token with it. LUNA fell from $80 on May 1 to $0.0001 by the end of the month.
Since then, Terra co-founder Kwon Do-hyung has offered several proposals to resurrect the dying project. One of them was a hard fork that would create a whole new version of the blockchain, with coins under the same name. The old network would be renamed Terra Classic and Luna to Luna Classic (LUNAC).
While the new coin has found some traction, trading at $2.03 at the time of writing, it is nowhere near LUNAC’s May high of $87.
The Terra meltdown has also had a ripple effect on Three Arrows Capital (3AC). On June 17, 2022, 3AC conceded to the Wall Street Journal (WSJ) that the LUNA catastrophe had caused heavy losses for the firm.
3AC Co-founder Kyle Davies told the WSJ that the firm had $200 million tied up in LUNA tokens dating back to the $1 billion fundraiser held by the LFG in February 2022. Following the implosion, the $200 million was vaporised. “The Terra-Luna situation caught us very much off guard,” said Davies to the WSJ.
According to The Block, 3AC also owes $6 million to BitMEX – a crypto exchange. In the last week, three exchanges, viz., FTX, BitMEX and Deribit liquidated all positions of 3AC when the hedge fund could not meet margin calls. While sources have told the WSJ that FTX and Deribit have only taken minor bruises, the BitMEX amount is significant.
3AC is looking at selling off assets to raise funds and repay debts while scouting for firms that can possibly resuscitate it. “We are committed to working things out and finding an equitable solution for all our constituents,” Davies told the WSJ.
And finally, on 13th June, the Celsius Network - one of the largest crypto lenders globally, announced that it was totally suspending withdrawals, swaps, and transfers. The move was quite massive as the project was managing assets worth $12 billion in May 2022 for 1.7 million customers worldwide. Investors have still been waiting for the protocol to reveal when or how will their funds be available for redemption.
While the cause is not related to the UST plummet, a series of strategic blunders have caused the protocol to “overheat”, according to a Coindesk report. In 2 separate incidents, Celsius lost $22 million in connection with a BadgerDAO hack and 38,000 ETH when Stakehound (an ETH staking service) lost private keys of wallets.
The Celsius Network cited “extreme market conditions” as the reason behind going cold. “We understand that this news is difficult, but we believe that our decision to pause withdrawals, swaps, and transfers between accounts is the most responsible action we can take to protect our community. We are working with a singular focus: to protect and preserve assets to meet our obligations to customers. Our ultimate objective is stabilising liquidity and restoring withdrawals, Swap, and transfers between accounts as quickly as possible,” read the announcement blog.
The protocol has also sought legal counsel and is exploring ways to resurface unscathed from the explosive situation. The options under consideration are financial restructuring and fund infusion from investors.
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