Binance, the world's largest cryptocurrency exchange, has halted the trading of Terraform Labs' Terra (Luna) and TerraUSD (UST) tokens on its platform following one of the industry's biggest meltdowns.
The exchange indefinitely suspended the trading of Luna and UST tokens across all its spot, cross margins and isolated margins pairs after the tokens lost nearly 100% of their value in a span of days.
The move, which follows the exchange pulling support for trading of futures contracts for the Luna token earlier on Thursday, comes as Terraform Labs has increased the circulating supply of Luna tokens to over 6.5 trillion, up from 386 million three days ago (according to Terrascope, a tool that tracks Terra stats) in an attempt to push its sister token, a supposed stablecoin, to regain its 1-to-1 peg to the dollar.
Scores of other crypto exchanges, including FTX, Crypto.com, KuCoin, OKX and CoinDCX, have taken steps in recent hours to address the incident.
In the meantime, Terraform Labs said it is halting the Terra blockchain and is working to "come up with a plan to reconstitute it." It's the second time the Terra blockchain has been frozen this week. Earlier on Thursday, Terraform Labs briefly halted the network to prevent any hacks.
"An exponential amount of new LUNA were minted due to flaws in the design of the Terra protocol. Their validators have suspended their entire network, resulting in no deposits or withdrawals possible to or from any exchange," said Changpeng Zhao, founder and chief executive of Binance, in a Twitter thread.
"Some of our users, unaware of the large amounts of newly minted LUNA outside the exchange, started to buy LUNA again, without understanding that as soon as deposits are allowed, the price will likely crash further. Due to these significant risks, we suspended trading," he said.
TerraUSD, a so-called algorithmic stablecoin, aims to be a substitute for the dollar by intertwining with Luna, which has no fixed value. The plan is that if the value of TerraUSD tumbles below $1, it could be "burned" and exchanged for a dollar's worth of Luna, and vice versa.
But when TerraUSD fell below $1 earlier this week, a reason of which is yet to be confirmed, that algorithmic vision showed its limits and miserably collapsed.
The loss of faith from the crypto community and aggressive panic selling prompted the price of Luna to nosedive to $0.0000011, from about $80 earlier this week. The value of UST was 3 cents at the time of initial publication of this story.
A few months ago @zhusu publicly ridiculed ETH and started relentlessly shilling LUNA. Lots of people followed
These influencers are setting our industry back
— Nick Tomaino (@NTmoney) May 12, 2022
Terraform Labs has been scrambling to find ways -- including reportedly trying to raise money -- to resolve the situation, but so far it has had no luck. Asked for his thoughts, Sam Bankman-Fried, co-founder of exchange FTX and investment and market making firm Alameda Research, said on Thursday that "the real, honest answer is that, probably, either UST or LUNA have to go to 0 (or both).
"There's no way to save both of them. (And it's not clear as of now that there's any way to save UST's peg even if you sacrifice LUNA.)," said Bankman-Fried, who has previously helped rescue a different project (SushiSwap).
Binance's Zhao, one of the most influential figures in the crypto industry, said he was "very disappointed" with how the incident has been handled by the Terra team. "We requested their team to restore the network, burn the extra minted LUNA, and recover the UST peg. So far, we have not gotten any positive response, or much response at all."
The change in value of UST this week. (Image and data: Binance)
Zhu Su, co-founder and partner at Three Arrow Capital, an investor of Terraform, said in a Twitter thread that the "attacks and subsequent de-peg risks were flagged by critics; the fast-growing ecosystem should have done more to move slowly and safely."
Su acknowledged that many industry figures had warned about such a potential attack in recent months. "The critics had genuine concerns about peg risks and going forward discussion must be encouraged, 'FUD' must be met with refutations, growth must be organic even if slower. This is Terra's DAO hack moment," he said.