Quote from: Pejoh Asu on Today at 09:17:13 AM

I do not understand why Terra is [...]

The thing is that Tera has not stopped minting its coin during the last 24 hours.

An issue of 25 billion coins has been added to the existing volume of 3 billion LUNA.

Quote

A leveraged hand used insider knowledge to short UST and triggered a bank run. The reason the user had insider knowledge is because they had a detailed understanding of the Terra Ecosystem. Anyone with enough money, knowledge, and motivation could perform this attack, but the number of people capable of doing this is pretty small. Crypto barron or possibly a state actor, but that is speculation.

Long version

The attack was initiated by a liquidity provider who knew ahead of time that (via front-running/public chain observation via bots or other mechanisms) a major transaction (from LFG) moving through the system by paying a generous gas fee (around 34K, I’ll try to find the sources), dumped their UST onto exchanges, and destabilized the liquidity pool. The deviation of peg initiated a bank run, and panic selling at a loss caused the peg to spiral.

Part of the reason that the attacker was able to know about the the transaction ahead of time was because the speed of transactions moving through the system was set quite slow. the passed Agora Proposal has temporarily increased the minting speed which should help with front-running.

Front-running is a core issue here and it is a pervasive problem in many crypto projects. It will need to be addressed in the future, it is perhaps the primary issue that initiated the problem as the sophisticated and leveraged user had “insider information” not widely available to less sophisticated users.

The other problem is that there is no deposit guarantee (think FDIC) in this space. Secondary insurance is available to protect digital assets, but the utility of this is not broadly appreciated by the majority of crypto investors. The reasons bank runs do not occur in the US is not because the reserve backing of USD (because it doesn’t have one), but because the majority of people’s savings are backed by FDIC so even in times of crisis there is no reason to withdraw your money from banks.

It will take some time, but when the UST peg is restored, I suggest a mechanism for ensuring/gauranteeing deposits be explored. It is possible that [Proposal] Terra x Citadel DAO - Accelerating the growth of BTC/4pool is related to this, but unclear at the time. This is theoretically what the LFG was for, but clearly the mechanism is not strong enough and provides no real gaurantee to individuals on the ecosystem.