TerraUSD (UST) algorithmic stablecoin

Released: April 2019
Occurred: May 2022

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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.

According to Terraform Labs co-founder Do Kwon, TerraUSD 'is the first decentralised stablecoin that is scalable, yield bearing and interchain.'

Reaction

In May 2022, TerraUSD lost its dollar peg amidst a wider crypto market crash, falling to USD 0.10. The fall precipitated a collapse in the price of LUNA to USD 0.09 from a high of USD 119.51, and wiped out USD 55 billion of market capitalisation.

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.

Attempts by TerraLabs to save UST’s 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.

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.

At the time of its collapse, TerraUSD had been the third largest stablecoin by market capitalisation, and Luna one of the ten largest cryptocurrencies.

Transparency

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.

Operator: Terraform Labs
Developer:
Terraform Labs

Country: Singapore; Global

Sector: Banking/financial services

Purpose: Manage financial marketplace

Technology: Blockchain; Virtual currency; Stablecoin; Smart contract algorithm
Issue: Robustness

Transparency: Governance; Black box; Marketing

System

Research, audits, investigations, inquiries, litigation

News, commentary, analysis

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Published: December 2022