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Stablecoin TerraUSD death spiral: Luna Foundation Guard sells assets to repay users

Stablecoin TerraUSD death spiral: Luna Foundation Guard sells assets to repay users

20 May, 2022 - 3 min read

Stablecoin TerraUSD death spiral: Luna Foundation Guard sells assets to repay users

Last week, stablecoin TerraUSD depegged from its $1 USD value on Monday, causing a ripple effect that wiped around $60 billion from the crypto markets.

Now its death spiral has led to the company selling its remaining digital assets to compensate remaining users, starting with the smallest holders first.

The stability of UST to remain pegged to the US dollar was based on its underlying algorithm, with part of its peg mechanism coming from printing sister cryptocurrency, Luna. Before last week, Luna was positioned as the third most held stablecoin behind US-asset backed stablecoins like tether and USDC. But following UST depegging, Luna lost nearly 100% of its value in less than a day.

The Luna Foundation moved quickly last week to deploy its own Bitcoin reserves to prop up the cryptocurrency’s price following UST depegging. It used nearly $US3.5 billion of Bitcoin to stabilise its price but this move was not enough.

The algorithm failed to maintain its peg to the US dollar after a series of sudden and large withdrawals, with the chief executive of DigitalX, Lisa Wade, describing the attack to the Australian Financial Review as an “act of evil genius probably carried out by a Wall Street hedge fund”.

Founder of Terraform Labs, Do Kwon, has stated that what is left of the organisation’s reserves (around $US85 million) would be used to pay back remaining users of UST.

And cryptocurrency investors who wanted to get out couldn’t if they tried, as Binance, the worlds largest cryptocurrency exchange, suspended trading of UST and Luna tokens. And it wasn’t the only exchange suspending the deposit and withdrawal of UST and Luna, with others like CoinSpot blocking access to Luna holdings last week.

Binance founder and CEO Changpeng Zhao said he was “very disappointed” in the incident and how it had been handled by the Terra team.

At the time of the death spiral, Mr Zhao said: “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.”

In 2018, Binance invested $3 million in Terraform Labs, helping gain the crypto exchange 15 million tokens worth around $1.6 billion at Luna’s peak price in April 2022. Following UST depegging from the dollar, Binane’s original investment crashed to less than $3,000.

After disclosing that Binance’s investment in Luna had plummeted, Zhao, one of the most influential figures in crypto, tweeted two words to sum up the TerraUSD and $Luna crash; “poor again”.

Poor again.https://t.co/88v2U2vjfM
— CZ 🔶 Binance (@cz_binance) May 17, 2022

What is next for Terra?

This dramatic fall from grace is not the end of Terra, if Founder, Do Kwon, has anything to say about it. In a series of tweets published this week, Kwon noted that Terra is “more than just $UST”, and that they would be moving forward with a revival plan for the cryptocurrency.

2/ It has been inspiring to partake in the dynamic discourse regarding the best next steps for Terra. Taking feedback from the community and thoughtful proposals, I would like to suggest the following for the path forward.https://t.co/E13VI8bkLh

A thread on our reasoning:
— Do Kwon 🌕 (@stablekwon) May 16, 2022

“The Terra chain as it currently exists should be forked into a new chain without algorithmic stablecoins called “Terra” (token Luna - $LUNA), and the old chain be called “Terra Classic” (token Luna Classic - $LUNC). Both chains will coexist,” said Mr Kwon.

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This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.

Alex Ritchie

Personal Finance Editor

Alex Ritchie is a Personal Finance Writer and Editor at RateCity, and has been writing about Australian finance for over six years. Her expertise and passion covers loans, credit, superannuation, and closing the gender pay gap, and she aims to help young Aussies to overcome their financial apathy. Alongside RateCity, Alex has been published in numerous publications, including Australia's Money Magazine, Business Insider, Lifehacker Australia, and in health via NPS MedicineWise.