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What Happened to TerraUSD’s Bitcoin Reserve


The collapse of the TerraUSD cryptocurrency left traders wondering what happened to the $3 billion war chest that protected it.

TerraUSD is a stablecoin, which means it should hold a stable value at $1. But after a crash earlier this month, the coin is only worth 6 cents.

In the first two days of this month, a nonprofit organization supporting TerraUSD was launched almost all of its bitcoin reserves in an effort to get it back to the typical $1, according to analysis by Elliptic Enterprises Ltd., a cryptocurrency risk management firm. Despite the massive rollout, TerraUSD has deviated further from its expected value.

Stablecoins are part of a crypto ecosystem that has flourished in recent years, accounting for around $160 billion in the $1.3 trillion crypto universe as of Monday. As the moniker implies, these assets are said to be non-volatile cousins ​​of bitcoin, dogecoin, and other digital assets, which tend to be highly volatile.

Cryptocurrency traders and market observers warned in recent months on social media that TerraUSD could deviate from its $1 peg. As an algorithmic stablecoin, it relies on traders to act as a backstop to maintain the value of the stablecoin by providing them with incentives. Some warn that if traders’ desire to hold money wanes, it could trigger a wave of selling of both, known as vortex of death.

To address those concerns, Do Kwon, a Korean developer who created TerraUSD, co-founded Luna Foundation Guard, a non-profit organization responsible for building a large volume of reserves. to act as a fulcrum of confidence. Mr. Kwon said in March that the organization would buy up to 10 billion dollars in bitcoin and other digital assets. But the organization hadn’t accumulated that much before the crash.

Mr. Kwon’s company Terraform Lab funded the fund through a series of donations starting in January. The fund also raised $1 billion to start its bitcoin reserve by sell that money of sister token Luna for crypto investment firms including Jump Crypto and Three Arrows Capital, announced the deal in February.

As of May 7, the fund had amassed around 80,400 bitcoins, worth about $3.5 billion at the time. Additionally, it has nearly $50 million worth of two other stablecoins, tether and USD Coin. The issuers of both stablecoins say their coins are backed by dollar assets that can be easily sold to meet buybacks. The sanctuary also hosts cryptocurrencies Binance coin and Avalanche.

Traders’ desire to hold both assets has waned after a series of large stablecoin withdrawals from Anchor Protocol, a type of crypto-banking where users deposit money to earn interest. This wave of sales increased, causing TerraUSD to drop below $1 and Luna also falling in love with it.

The Luna Foundation Guard said that on May 8, when the price of TerraUSD began to fall, it began converting reserve assets into stablecoins. In theory, selling bitcoin and other reserves could help stabilize TerraUSD by creating demand for the asset as a way to restore confidence. This is similar to how central banks protect their falling local currencies, by selling currencies issued by other countries and buying their own.

The fund said it has transferred bitcoin reserves to another partner, allowing them to enter into large transactions with the platform. In total, it sent more than 50,000 bitcoins, about 5,000 of which were returned, for approximately 1.5 billion TerraUSD stablecoins. It also sold all Tether and USDC stablecoin reserves for 50 million TerraUSD.

When that failed to support the $1 peg, the fund said Terraform sold about 33,000 bitcoins on behalf of the organization on May 10 in a last-ditch effort to bring the stablecoin back to the $1 level. In return, it has about 1.1 billion TerraUSD.

To execute these transactions, the platform transferred funds to two crypto exchanges: Gemini and Binance, according to an analysis by Elliptic.

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While the major crypto exchanges are likely the only ones in the ecosystem that can handle the large transactions that the platform needs to do quickly, it also causes concern among investors. trade when both TerraUSD and Luna increase. Unlike peer-to-peer transfers in crypto, specific transactions made in centralized exchanges are not exposed on the public blockchain, the digital ledger that underpins cryptocurrency transactions. death.

Despite the platform’s schedule, the inherent lack of transparency has raised concerns among investors about how funds are being used among some traders.

“We can see movements on the blockchain, we can see funds moving to these massive centralized services. We don’t know the motive behind these transfers and whether they are transferring them to others or whether they are transferring funds to their own accounts on these exchanges,” said Tom Robinson, co-founder of Elliptic said.

Protecting Luna did not respond to The Wall Street Journal’s request for an interview. Mr. Kwon did not respond to a request for comment. Earlier this month, the fund said it still has about $106 million in assets it will use to fund compensation for the rest of TerraUSD, starting with the smallest holders. It does not provide specific details on how this compensation might work.

WSJ’s Dion Rabouin explains why Wall Street is betting big on crypto right now and what that means for the new asset class and its future. Photo compilation: Elizabeth Smelov

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