TerraUSD (UST) algorithmic stablecoin collapses
Occurred: May 2022
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The TerraUSD algorithmic stablecoin collapsed, wiping out USD 55 billion of market capitalisation and leaving investors out of pocket.
It remains unclear what precipitated the collapse, with some blaming an acceleration of customer withdrawals spiralling into a de facto bank run, thereby destabilising the algorithmic balancing mechanism between TerraUSD and LUNA.ย
Attempts by TerraLabs to save USTโs peg by selling almost all of its Bitcoin reserves for UST, as well as other strategies, failed to save the stablecoin. Other cryptocurrencies are tied to more stable assets, such as the US dollar or gold.ย
The crisis fueled a credit crunch that saw hedge fund Three Arrows Capital (3AC) forced into liquidation, and cryptocurrency lender Celsius Network and crypto broker Voyager Digital filing for Chapter 11 bankruptcy.ย
At the time of its collapse, TerraUSD had been the third largest stablecoin by market capitalisation, and Luna one of the ten largest cryptocurrencies.
TerraUSD (also known as UST) is an algorithmic stablecoin created in 2018 by Terraform Labs that is built on the Terra blockchain. Pegged to the US dollar through a complex algorithmic relationship with its support cryptocurrency coin LUNA, TerraUSD can be exchanged with LUNA tokens.
Per The Register, UST and Luna are linked by an algorithm in a 'smart contract' that's supposed to keep the value of the UST pegged to 1 USD without fiat currency reserves. The algorithm burns or deletes Luna tokens to create new UST tokens and vice versa in an effort to balance supply and demand.
โ In February 2023, the US Securities and Exchange Commission (SEC) charged (pdf) Terraform Labs Do Kwon with fraud.
Transparency ๐
Defended by Do Kwon as a 'transparent and open source' system, the collapse of TerraUSD is viewed as much a governance and communications failure as a pure algorithmic failure.
Facing allegations of fraud and embezzlement, including that TerraUSD was a ponzi scheme, TerraLabs co-founder Do Kwon disappeared after TerraUSD's collapse. Arrest warrants have been issued for Kwon and his fellow co-founder Daniel Shin.
Investigations, assessments, audits ๐ง
News, commentary, analysis ๐๏ธ
https://www.theguardian.com/technology/2022/may/11/terra-price-cryptocurrency-stablecoin
https://fortune.com/2022/05/19/luna-terrausd-ust-algorithmic-stablecoins-doomed
https://www.bloomberg.com/graphics/2022-crypto-luna-terra-stablecoin-explainer/
https://micky.com.au/tether-transparency-issue-resurfaces-after-signals-of-empty-cash-reserves
Page info
Type: Incident
Published: December 2022
Last updated: May 2024