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Terra Expands Stablecoin Reserve by Purchasing $100m worth of Avalanche Tokens

The Luna Foundation Guard (“LFG”), primarily focused on the Terra blockchain, expands its TerraUSD (“UST”) stablecoin reserve by purchasing $100 million worth of Avalanche tokens.

The native token of the Avalanche blockchain becomes the second-largest asset in the UST reserve after the Bitcoin token.

Terra is a blockchain protocol that uses fiat-pegged stablecoins to power price-stable global payments systems, which includes TerraUSD (“UST”) – the flagship stablecoin of the Terra network and the leading decentralized stablecoin in DeFi by market cap

Terra’s UST stablecoin, backed by bitcoin tokens, could eventually reach $10 billion, the company said. To strengthen the ability of Terra’s UST stablecoin to be pegged to U.S. dollar fiat, the company added $230 million in bitcoin on Wednesday, following an injection of more than $1 billion in bitcoin in January.

Emin Gün Sirer, CEO of The Ava Labs said that:

“Terra’s ability to scale their stablecoins is one of the reasons that drew Avalanche to its platform.”

Do Kwon, the founder of Terraform Labs, the blockchain startup in charge of the Terra blockchain and LUNA coin, said Bitcoin will remain the “primary backer” for the UST stablecoin, but the deal with Avalanche “buys Avalanche’s UST and Terra a lot of user familiarity.”

As reported by blockchain.News on December 9, 2021, one of Asia’s biggest Venture Capital firms, Chiron Partners, has launched a $50 million ecosystem fund christened the Chiron Terra Fund I (CTI), aimed at supporting innovative projects that are emerging from the Terra blockchain ecosystem.

Will Terra’s UST and LUNA Crash Cause a Shift to ‘Cryptos that have Stood the Test of Time’?

LUNA has left crypto enthusiasts’ mouths agape because they could never imagine in their wildest dreams that one of the top ten cryptocurrencies could collapse to near-zero overnight.

LUNA and TerraUSD (UST) are the native tokens of the Terra blockchain network developed by South Korean fintech firm Terraform Labs.

LUNA sent shockwaves to the crypto market because it nearly lost 100% of its value by hitting an all-time low of $0.027 on May 12 from the all-time high (ATH) price of $119.18 recorded nearly a month ago on April 5, according to CoinGecko.

Source: TradingView

As one of the top ten cryptocurrencies, LUNA’s market capitalisation had surpassed $40 billion, but the present crash drove it to lows of $349,000.

The algorithmic UST stablecoin on the Terra network was not spared either because it nosedived to historic lows of $0.29 on May 11. The stablecoin’s ATH was recorded on January 11, 2021, when the price soared to $1.09, according to CoinGecko.

What caused the crash?

Things started going south when UST’s price experienced a free fall to the extent that leading crypto exchange Binance temporarily halted its withdrawals together with that of LUNA.

Anshul Dhir, the co-founder and COO of EasyFi Network, opined:

“Terra’s fall could be attributed to large scale selloffs of the LUNA tokens owing to the reported “de-peg ” of the algorithmic stable coin. This selloff must have also got exacerbated with the market already being in a largely bearish mode.”

The algorithmic nature of UST could have triggered the crash because its value is not directly pegged to the US dollar, according to Ransu Salovaara, the CEO of decentralised finance platform Likvidi. He added:

“It’s important now to acknowledge that Terra is a so-called algorithmic stablecoin, not directly backed by USD. The most popular stable coins like Tether (USDT) and USDC are actually backed by USD in the bank and both of those survived the market sell-off well.”

Therefore, the current crash shows the problems associated with algorithmic-based stablecoins because they are at the experimental stage.

Dhir pointed out:

“Experimental algorithmic stable coins are volatile and it is believed that it will take some time to find a good algorithmic stable coin. Over a period of time such programmable money should be possible which ultimately is the end goal of decentralized finance.”

Explaining the current fiasco, Do Kwon, the founder of Terraforms Labs, took to Twitter and tweeted:

“The price stabilization mechanism is absorbing UST supply (over 10% of total supply), but the cost of absorbing so much stablecoins at the same time has stretched out the on-chain swap spread to 40%, and Luna price has diminished dramatically absorbing the arbs.”

Was Do Kwon the face behind the failed algorithmic Basis Cash stablecoin?

Former Terra employees claimed that Do Kwon, the company’s CEO behind the Terra network, was one of the pseudonymous co-founders of the failed algorithmic Basis Cash (BAC) stablecoin.

Hyungsuk Kang, a former Terraform Labs engineer, noted that BAC was a side project. He added:

“Basis Cash wasn’t tested at the moment, and we weren’t even sure it would work. Kwon wanted to just test it out. He said that this was a pilot project for doing that.”

Launched in late 2020 on the Ethereum (ETH) network, Basis Cash was deemed a game-changer that could revive the decentralised finance (DeFi) Sector.

However, BAC never saw the light of day because it dropped below the $1 peg and traded below the 1 cent mark on May 12 by hovering around $0.0059, according to CoinGecko.

Just like UST, Basis Cash had to maintain the $1 threshold through code and not collateral. Therefore, history seems to be repeating itself concerning LUNA and UST.

‘Cryptocurrencies that have stood the test of time’

On January 3, 2009, Bitcoin’s genesis block was mined, setting the ball rolling on what the crypto space would offer.

Thirteen years down the line, Bitcoin’s dominance in the crypto sector continues to be felt even though its journey has not been smooth sailing.

For instance, as the coronavirus (COVID-19) pandemic continued to wreak havoc in early 2020, Bitcoin shed off more than 50% of its value in less than 48 hours on March 12, commonly called the ‘Black Thursday’ based on the global stock market crash.

As panic selling engulfed the market, Bitcoin’s price nosedived to $3,800 from around $8,000.

However, these scenes did not stop BTC from attaining the then all-time high (ATH) of $64,800 a year later in April 2021.

A month later, the leading cryptocurrency found itself on the receiving end after plummeting by more than 50% to hit lows of $30K based on Chinese authorities’ intensified crackdown on crypto mining.

Nevertheless, Bitcoin scaled the heights to set a new ATH of $69,000 in November 2021.

Despite the present bearish picture, Bitcoin has shown that it’s a hard nut to crack based on the ups and downs endured in its 13-year journey.

Veteran trader Peter Brandt believes Bitcoin is the face of crypto. He pointed out:

“This decline is just plain Lunatic LUNA. I have spoken open about my distrust of altcoins and that crypto is Bitcoin and Bitcoin is crypto. The problem is that distrust in that which is distrustful can spill over into that which is trustworthy (Bitcoin).”

Source: TradingView

Ethereum has also been in existence for close to seven years, and it is crafting a name for itself in the DeFi sector.

Therefore, the LUNA and UST crash might shift the narrative to more established cryptocurrencies that have stood the test of time.

Terra Resumes after Halting Blockchain Production to Prevent Governance Attacks

Terraform Labs, the company which supports the Terra ecosystem, briefly halted the Terra blockchain for two hours on Thursday after a dramatic slump in LUNA and UST, before restarting at around 1:45 p.m. local time.

The company said the suspension of the network was to implement a patch preventing users from staking on its network.

Terraform explained it briefly that the suspension of blockchain operations as LUNA’s price dropped too low, that need to “prevent governance attacks” adding that:

“Terra validators have decided to halt the Terra chain to prevent governance attacks following severe $LUNA inflation and a significantly reduced cost of attack.”

The Terra blockchain network stopped generating new blocks after its block height was 7603700, meaning holders could not move their Terra assets until the blockchain was unfrozen.

At the time of writing, the Terra stablecoin TerraUSD (UST) was off the $1 level it was supposed to hold, trading at $0.1288, losing its peg to the U.S. dollar.

The founder behind it, Do Kwon, noted in a series of tweets “Before anything else, the only path forward will be to absorb the stablecoin supply that wants to exit before $UST can start to re-peg. There is no way around it.”

By late Thursday, LUNA had fallen to less than $0.50 from nearly $120 in early April. LUNA pared all of the gains it had accumulated over the past 12 months.

South Korea Launches “Emergency” Inspection of Crypto Exchanges Following Terra Crash

Financial authorities in South Korea have beefed up crypto exchange inspections to boost investor protection following the recent collapse of LUNA and TerraUSD (UST) tokens

Per the announcement:

“The Financial Services Commission and the Financial Supervisory Service (FSS) have recently asked local cryptocurrency exchange operators to share information on transactions linked to TerraUSD and Luna, including the volumes of their trading, their closing prices, and the number of relevant investors.”

The financial watchdogs are also scrutinizing what caused the recent market crash and creating countermeasures for future events.

Confirming the ongoing inspection, an official of a local crypto exchange stated:

“Last week, the financial authorities asked for data on the number of transactions and investors and sized up the exchanges’ relevant measures. I think they did it to draw up measures to minimize the damage to investors in the future.”

Nearly 200,000 investors in Korea are speculated to have invested in LUNA and UST.

Despite the Terra tokens being invented by a Korean national, the authorities are taking the case seriously because they were traded globally. Do Kwon, the CEO of Terraform Labs, is the face behind the Terra blockchain.

The Terra ecosystem has been making headlines over the past week because LUNA collapsed to near-zero overnight despite being one of the top ten cryptocurrencies.

Kwon has proposed hard forking the Terra blockchain so that the troubled network can be salvaged, and if his suggestion is implemented, the new chain is set to go live on May 27.

Following the Terra crash, Kwon has been the centre of scrutiny, with some quarters suggesting that he was one of the pseudonymous co-founders of the failed algorithmic Basis Cash (BAC) stablecoin.

Therefore, history seems to be repeating itself because Basis Cash had to maintain the $1 threshold through code and not collateral, just like UST.

Do Kwon Suggests Terra Hard Fork to Revive Troubled Network

Do Kwon, the CEO of Terraform Labs, believes hard forking the Terra blockchain will play an instrumental role in saving the troubled network.

In a series of tweets, Kwon suggested:

“The Terra chain as it currently exists should be forked into a new chain without algorithmic stablecoins called “Terra” (token Luna – LUNA), and the old chain be called “Terra Classic” (token Luna Classic – LUNC). Both chains will coexist.”

According to Investopedia, a hard fork refers to a radical change to the protocol of a blockchain network that effectively results in two branches, one that follows the previous protocol and one that follows the new version. In a hard fork, holders of tokens in the original blockchain will be granted tokens in the new fork as well, but miners must choose which blockchain to continue verifying.

After being forked, the new chain, Terra (LUNA), will not support the algorithmic TerraUSD (UST) stablecoin, whereas the old one will house the Luna Classic (LUNC) token.

Kwon’s proposal for a hard fork is based on the lack of a consensus among different stakeholders. He stated:

“Competing interests from varied stakeholders (e.g.,$LUNA holders, UST holders, Terra builders, etc.) make it extremely difficult and unlikely to achieve consensus on a cohesive, congruent plan.”

Therefore, the new LUNA will be airdropped to residual UST holders, essential app developers, and LUNC holders.

The rain started beating the Terra network after UST’s price experienced a free fall to the extent that leading crypto exchange Binance temporarily halted its withdrawals together with that of LUNA.

Things got worse for LUNA, given that it sent shockwaves to the crypto market by collapsing to near-zero overnight.

At the time, Kwon pointed out that the price stabilization mechanism had a hand in the problem. He noted:

“The price stabilization mechanism is absorbing UST supply (over 10% of total supply), but the cost of absorbing so much stablecoins at the same time has stretched out the on-chain swap spread to 40%, and Luna price has diminished dramatically absorbing the arbs.”

If Kwon’s proposal sees the light of day, the new chain will go live on May 27 because he trusts that Terra is more than UST.

Prosecutors Investigate Do Kwon with Ponzi Fraud Charges amid Terraform Labs Dissolvement

Do Kwon’s scandal seem to be deepening. Prosecutors are investigating whether they will file Ponzi fraud charges against him following the Terra crash, according to The Korea Times.

This comes a day after LUNA and UST investors filed a legal complaint against Do Kwon and Daniel Shin, the co-founders of Terraform Labs. LUNA and UST are the native tokens of the Terra network developed by South Korean fintech company Terraform Labs.

Having wiped out at least $38 billion of investors’ money in a week, prosecutors in South Korea are delving deeper into the Terra crash. For instance, the Seoul Southern District Prosecutors Office that is leading the case intends to seek the services of an investigation team based on lodged complaints and various factual backgrounds.

Per the announcement:

“Prosecutors in charge of the case are looking into whether they can make a Ponzi scheme case against “Anchor Protocol,” under which depositors of TerraUSD are guaranteed a 20 percent annual return.”

Financial authorities believe 280,000 South Korean investors hold approximately 70 billion LUNA coins, even though the exact amount remains unknown.

Earlier this week, relevant governmental agencies beefed up crypto exchange inspections to try and unravel what transpired during the crash.

Did Do Kwon dissolve Terraform Labs just days before the crash?

Reportedly, Kwon dissolved Terraform Labs on April 30, just days before the Terra tokens came down with a thud.

According to Digital Today, based on official documents in the custody of South Korea’s supreme court registry office, the decision to terminate the firm was reached at a general shareholders meeting held on April 30.

Similar sentiments were shared by a Reddit user, who noted:

“KWON-DO-HYUNG is listed in this Korean document as dissolving his company Terraform Labs on April 30th, registered May 4th. The act of dissolving just days before the collapse of UST suggests the intent to eliminate responsibility for the aftermath, which serves as evidence that he knew something was going to happen.”

Moreover, Kwon was recently slapped with a tax evasion fine of $78 million, Blockchain.News reported.

LUNA and UST Crash Could Have Been Averted if Bitcoin Reserves were Used Earlier, Binance CEO Says

The collapse of LUNA and UST, the native tokens of the Terra network, could have been avoided if the Luna Foundation Guard (LFG) had used its Bitcoin reserves earlier, according to Binance CEO Changpeng Zhao (CZ).

Sharing his insights on the Binance website, CZ noted:

“The Terra team was slow in using their reserves to restore the peg. The entire incident may have been avoided if they had used their reserves when the de-peg was at 5%. After the value of the coins had already crashed by 99% (or $80 billion), they tried to use $3 billion to do the rescue. Of course, this didn’t work.”

Things started going wrong when the price of the algorithmic UST stablecoin experienced a free fall to the extent that it hit lows of $0.225 from its $1 peg.

Later on, LUNA sent shockwaves to the crypto market because it nearly lost 100% of its value overnight after reaching the near-zero level.

CZ also opined that the rain started beating the Terra network after more LUNA was minted in an attempt to salvage the situation. He pointed out:

“Printing money does not create value; it just dilutes existing holders. Exponentially minting LUNA made the problem a lot worse.”

The other flaw entailed using over-aggressive incentives like Anchor’s 20% annual percentage yield (APY). CZ stated:

“Specifically, Anchor’s 20% fixed APY to push for (in-organic) growth. You can use incentives to attract users to your ecosystem. But eventually, you need to generate “income” to sustain it, i.e., more revenue than the expenses. Otherwise, you will run out of money and crash.”

The Terra crash has triggered intense investigations on whether there was something sinister from the network founders. For instance, prosecutors indicated that they could file Ponzi fraud charges against Do Kwon, the CEO of Terraform Labs, and the face behind the Terra network.

Claims have also surfaced that Terraform Labs was dissolved on April 30, just days before the Terra tokens collapsed.

UK Finance Ministry Proposes Safety Net Measures against Stalling Stablecoins

Britain’s finance ministry has announced plans for adapting existing regulations to mitigate any collapse of major stablecoins, like the case of TerraUSD that happened two weeks ago.

In a consultation paper published on Tuesday, the British Treasury Department (the HM Treasury) noted the need to manage risks associated with the failure of a systemic digital settlement asset firm, which could have a broad range of financial stability and consumer protection impacts.

“Since the initial commitment to regulate certain types of stablecoins, events in crypto-asset markets have further highlighted the need for appropriate regulation to help mitigate consumer, market integrity and financial stability risks,” the UK regulator said.

As a result, the finance ministry mentioned that mainstream payment firms, banks, and insurers “must comply with rules which ensure their deposit accounts, policies or services can be transferred quickly to another provider if they go bust, to help avoid panic and contagion in markets.”

The HM Treasury disclosed that further work continues to consider whether bespoke rules are needed for winding down failed stablecoins. The regulator also considers the need to adapt existing legal frameworks to be effectively applied to manage the risks posed by the possible failure of systemic digital settlement asset firms for financial stability.

The British ministry also proposes amending the Financial Market Infrastructure Special Administration Regime, which would give the Central Bank of England powers to ensure continued operations of stablecoin payment services during a crisis.

Regulatory Scrutiny Heightened

The latest development is a continued action by the UK Treasury Department’s plans to regulate stablecoins in light of the mega crash.

The collapse of TerraUSD stablecoin triggered regulators’ concerns in the little-regulated sector. The plunge has strengthened the view that the design of some stablecoins poses serious risks.

The US treasury secretary, Janet Yellen, recently called for stablecoin’s regulation after the de-pegging debacle overtook TerraUSD.

Following the TerraUSD de-pegging fiasco, South Korea also mentioned plans to strengthen stablecoin regulation. South Korean financial regulators are currently conducting an emergency investigation of cryptos to expedite the adoption of the “Digital Asset Basic Act.”

Stablecoins to be Issued by Licensed Banks and Trust Companies in New Japanese Law

In a move to protect investors, Japan’s parliament has passed a bill classifying stablecoins as digital money that must be connected to the nation’s currency, yen, or another legal tender.

The legal framework, which is expected to be rolled out in a year, also stipulates that holders have the right to redeem stablecoins at face value. Per the announcement:

“The legal definition effectively means stablecoins can only be issued by licensed banks, registered money transfer agents and trust companies. The legislation doesn’t address existing asset-backed stablecoins from overseas issuers like Tether or their algorithmic counterparts.”

It seems it’s a race against time for global governments to put up guardrails in the stablecoin arena following the shocking collapse of TerraUSD (UST), which triggered the loss of approximately $60 billion.

Things started going haywire after the algorithmic UST stablecoin on the Terra network experienced a de-pegging from its US Dollar benchmark.

Some experts like Ransu Salovaara, the CEO of DeFi platform Likvidi, stated that the algorithmic nature of UST could have triggered the crash.

This explains why governments are looking at cracking the whip in the stablecoin space because tokens in this sector have a market value of around $161 billion, according to CoinGecko.

Tether (USDT) tops the stablecoin list, followed by Circle’s USD Coin (USDC) and Binance USD (BUSD).

Is it the end of the algorithmic stablecoin era?

Speaking to CNBC during the World Economic Forum in Davos, Reeve Collins noted that it was both unfortunate and not a surprise that money was lost through the algorithmic UST stablecoin because smart people were trying to peg it to the dollar.

The Tether co-founder added:

“A lot of people pulled out their money in the last few months because they realized that it wasn’t sustainable. So that crash kind of had a cascade effect. And it will probably be the end of most algorithmic stablecoins.”

With algorithmic-based stablecoins being at the experimental stage, volatility becomes inevitable.

Anshul Dhir, the co-founder, and COO of EasyFi Network pointed out:

“Experimental algorithmic stable coins are volatile, and it is believed that it will take some time to find a good algorithmic stable coin. Over a period of time, such programmable money should be possible, which ultimately is the end goal of decentralized finance.”

Therefore, time will tell how things turn out for algorithmic stablecoins moving forward.

NEAR Protocol to Wind Down Stablecoin USN, Allocating Funds for User Protection

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The NEAR Foundation, an organization, supporting the NEAR blockchain, announced on Monday that it is winding down its stablecoin, popularly known as USN.

The foundation said it is shutting down the stablecoin after the token started exhibiting risky characteristics similar to those witnessed in the TerraUSD stablecoin that terribly crashed this year and lost investors’ funds worth over 30 billion dollars.

The Near Foundation said USN recently became undercollateralized, meaning there is insufficient collateral backing the stablecoin.

In April, NEAR protocol launched its USN stablecoin issued by the DAO Decentral Bank (DCB). However, Decentral Bank recently advised the Near Foundation that the stablecoin had become undercollateralized, a condition that is associated with algorithmic stablecoins, especially in “extreme market conditions.” DCB further disclosed that there was also double-minting of USN, a condition that contributed to the under-collateralization.

In a statement issued on Monday, Decentral Bank said it would shut down the USN project. “USN has faced many headwinds over the last few months with an increased regulatory focus and changes in market perception from recent high-profile incidents,” Decentral Bank stated.

Decentral Bank said due to such issues. They have taken the difficult decision to shut down the USN project in a responsible manner that ensures USN holders are protected. The NEAR Foundation said it is using $40 million to fund a “USN Protection Programme” to protect investors as the stablecoin winds down.

When NEAR Protocol’s USN stablecoin was launched first in April, it was an algorithmic stablecoin, but it was later changed to be backed by USDT tokens — the largest stablecoin in the crypto market. Despite the update, USN became “susceptible to under-collateralization during extreme market conditions,” which could put investors at risk, the NEAR Foundation explained.

While stablecoins are considered as the backbone of the crypto economy, regulators recently have launched increased scrutiny against trading of such tokens, mainly because of TerraUSD stablecoin’s fatal collapse in May. TerraUSD was an algorithmic stablecoin not backed by anything but rather relied on code to maintain its value. This code eventually failed – leading the stablecoin to lose its peg and crash.