Luna Foundation Guard, the body tasked with managing the reserves used to support the TerraUSD (UST) stablecoin, has admitted that it dispersed nearly all of its reserves in an attempt to prop up the now failed stablecoin.
On Twitter, LFG said it had dispersed 52,189 bitcoin to a “trade counterparty” as UST fell below its $1 peg. Terra – as opposed to LFG directly, dumped a further 33,206 bitcoins in an attempt to save the stablecoin. LFG also dispersed other tokens, including BNB, tether, USDC and Avalanche, in an attempt to prop up the cryptocurrency. The total of all the cryptocurrencies dispersed was worth nearly $3 billion.
CNBC reports that as of Monday, LFG has just 313 bitcoin in reserve, worth approximately $9.3 million and a total of $85 million in crypto assets. The foundation said it would use the remaining totals to “compensate remaining users” of UST.
The fall from grace of UST and its linked Luna token began in the second week of May. As reported on May 11, the algorithm was meant to use the supply of UST and Luna to maintain its peg. UST is created by burning – or destroying Luna, which decreases Luna’s supply to increase UST’s supply and vice versa. The platform also had an arbitrage mechanism that allowed traders to buy and sell the two tokens to help stabilize the prices.
A normal stablecoin is backed by money and non-money financial reserves. In contrast, Terra is an algorithmic stable coin in that it is not pegged to reserves versus a complex code. If it sounds somewhat complicated, it ultimately led to the system collapsing. That some financial reserves being held were subsequently dispersed in an attempt to prop UST up is even more bizarre – gutting reserves at a time of price volatility goes against standard practice in the industry.
Exactly to who the reserve funds were dispersed is also not clear. LFG has denied accusations that it used the reserve funds to bail out “whales” – large investors. “There was never any deal for ‘insiders’ to exit,” LFG claimed. “LFG funds were merely used squarely within its mandate to help protect UST peg.”
The collapse of UST and Luna could not have come at a worse time for the cryptocurrency market, which has already been facing downward pressure this year. The amount of money lost by investors in UST and Luna is also staggering – holders of both are estimated to have lost $42 billion in the last week – not exactly confidence building.
That said, cryptocurrency markets have been hit hard by frauds and market corrections in the past and have subsequently recovered. Bitcoin has not traded as low as it did at one point last week as was sitting at just below $30,000 as of 8:05 p.m. EDT.