As a kid, I remember when my father tried to use a broom handle in a last ditch effort to support a roof that was collapsing from the weight of nearly three feet of snow. You can guess how well that went. In a similar vein, Terra blockchain reportedly spent $US3.5 ($5) billion to keep the roof from collapsing in on itself. Now we’re seeing just how much it cost the once-popular cryptocurrency for its faulty broom handle.
The nonprofit Luna Foundation Guard, who oversees and supports the TerraUST stablecoin and its blockchain’s native coin Luna, said in a tweeted statement Monday that on May 7 it had over 80,000 bitcoin in its wallet alongside many thousands of other various coins. The reserve was built to support Terra if it ever dropped below $US1 ($1.43). After TerraUST started to falter May 8, the LFG reported it loaned and traded its many thousands of reserve coins to maintain the peg it had in its stablecoin.
A stablecoin system like TerraUST is tied to a currency, which in this case was the U.S. dollar, to provide financial security. One TerraUST was equivalent to $US1 ($1.43), but unlike other stablecoins Terra was algorithmically stabilised rather than being backed with assets, and it worked with it’s sister coin Luna in a kind of closed ecosystem to support each other to maintain the price of the currency. However, Terra started to falter around the weekend of May 8, which made people sell off their Luna in droves, creating a death spiral for both tokens. Now TerraUST is being traded at just 9 cents ($0.12) on the dollar.
After the rush to trade its reserves last week, the LFG said it is left with just 313 bitcoin alongside other coins. It has 222,700,000 Luna coins in its reserves as well, though currently the vast majority is staked with validators, meaning they’re being used to support the Terra blockchain which uses a proof of stake model. LFG stated that the Luna is unbonding and should be returned to stakers within 20 days.
Researchers at The Block estimated that the foundation had gone from $US3.1 ($4.45) billion in reserves to just $US87 ($124) million. Meanwhile, the foundation said it is compensating users of TerraUST with its remaining tokens starting with smallest holders first.
Conspiracies were on the move from the starting gun after the stablecoin’s price cratered last week. Some users baselessly claimed that the foundation and Terra were supporting the “whales,” AKA the largest holders of Luna and Terra, first. The LFG denied this.
There was never any deal for any "insiders" to exit. LFG funds were merely used squarely within its mandate to help protect UST peg https://t.co/wjXQw5vNyu— LFG | Luna Foundation Guard (@LFG_org) May 16, 2022
Terra founder Do Kwon had previously said that they would be providing documentation of the use of reserves, but the LFG’s latest tweets leaves several questions unanswered. CoinDesk has reported on some sceptical analysts who were confused by why much of the bitcoin ended up in major crypto exchanges Gemini and Binance, though it’s hard to determine what happened to the coins after that.
What likely didn’t help Luna support itself was the rapidly declining price of practically all crypto around that time, including bitcoin. CNBC reported last Thursday that bitcoin was hitting price lows it hasn’t seen in well over a year, and that investors lost a total of $US200 ($286) billion during the rapid selloffs. Ether, the second biggest cryptocurrency next to bitcoin, has struggled to keep above trading at $US2,000 ($2,868), compared to when it was going for over $US4,400 ($6,310) at the end of 2021.
Luna and other cryptocurrencies’ fall these last two weeks has regulatory hounds ready to pounce. The International Organisation of Securities Commissions is considering bringing a centralised regulatory body to what has traditionally been called decentralized finance.