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As UST depegged from $1 to $0.01, retail investors held the bag - 60.4% of them held it until the bitter end, and the rest suffered an average loss of 70%. But - why? Where did the confidence come from? Let's better understand the truth behind the first depeg - in May 2021.
There were tens of factors at play that increased investor confidence during the 2022 depeg, including LFG advertising, Do Kwon's confident tweets, and Anchor's perceived safety - but savvy investors were looking at historical data. You see, UST has depegged once before. (1/12)
23 May 2021 - a crypto market sell-off jump-starts UST's first ever serious deviation from its peg. You are familiar with the conditions surrounding it - LUNA is dropping, cascading liquidations exacerbate the situation, and UST slips down to $0.95 - Terra is about to die. (2/12)
Here is the truth people don't know. At this point, Do Kwon is desperate to save his baby, and he knows he can't save it himself. He knows the death spiral all too well from Basis Cash (which he hid from investors). LUNA & UST are both on a crash course. He needs capital. (3/12)
He gets on the phone with Jump Crypto, a VC fund he has been working with, and begs them to come to the rescue. Jump's eyes glisten with greed, and right there, the deal is done - Jump will bail Terra out in exchange for a monthly LUNA payment - more details another day. (4/12)
This bailout was never publicized. You won't find articles about it online - it was intentionally concealed from retail investors. We know all of this now thanks to my source from within Jump. But, how did the Jump bailout affect investor behaviour last month? (5/12)
To the public, it looked like the depeg happened and the peg was magically restored by a mystery capital injection. At this point, Do Kwon has the perfect excuse to reinforce his fraudulent narrative - retail usage. Chai users using Terra stablecoins, organic demand... (6/12)
In a thread about the 2021 depeg and in interviews after, Do Kwon implies that the peg was restored thanks to UST having a strong, organic base of demand that rushes in no matter the market conditions. This was false - Chai wasn't even using UST at the time. (7/12)pic.twitter.com/AnWX6TsMxM
But, more importantly, he didn't mention the Jump bailout, which was the most critical factor in defending the peg. UST savers were further led to believe in the 'self-correction' narrative despite the back room deal, further reinforcing their belief in the peg mechanism. (8/12)
Fast forward to May 2022. The depeg happens, and it's a perfect storm for retail investors to lose everything. Large funds get out quickly thanks to their advanced liquidity monitoring systems - some even knew about the bailout. The average normie believes Do's tweets... (9/12)
...But even the crypto-savvy retail investor has been fraudulently instilled with false confidence in the peg. They believe this has happened before, and the market self-corrected. What if they sell at $0.80 and it repegs like last time? It's better to hold, right? (10/12)
But it's too late. LUNA & UST enter the death spiral. Do asks funds, including Jump, for another bailout - he almost gets one - but LUNA starts falling far too fast, and VCs quickly pull offers knowing that there's no point saving the peg anymore. A grand collapse ensues. (11/12)
This cocktail of narrative manipulation, hidden deals, exuding false confidence on Twitter, two years of heavy marketing & false promises, and protocol-level fraud created the perfect exit liquidity mechanism to harm retail the most, ultimately leaving them with the bag. (12/12)
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