Terra: Luna Foundation Guard spent $2.8 billion to defend UST peg
Terra: Luna Foundation Guard spent $2.8 billion to defend UST peg
Stable Coin

Terra: Luna Foundation Guard spent $2.8 billion to defend UST peg

By Andrea Porcelli - 17 Nov 2022

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Following the collapse of Terra’s algorithmic stablecoin UST, the Luna Foundation Guard (LFG), the organization created to protect the coin’s peg, released an audit report. 

In the report, LFG claims to have spent as much as $2.8 billion, the equivalent of the value of 80,081 BTC and $49.8 million in stablecoin to defend the UST peg. 

UST was an algorithmic stablecoin designed to maintain its peg through market forces.

Efforts by Luna Foundation Guard (LFG) and Terraform Labs (TFL) ultimately failed, with UST’s value falling to zero as the $60 billion ecosystem met its end. 

The collapse led to widespread contagion throughout the cryptocurrency industry, with numerous lenders, brokers, and exchanges filing for bankruptcy protection due to exposure to the ecosystem.

Luna Foundation Guard’s report on protecting Terra’s stablecoin

Experienced third-party auditing firm JS Held, was hired to conduct a technical audit for the transparency in the trading using blockchain ledgers and in the efforts of The Luna Foundation Guard (LFG) and Terraform Labs (TFL) to defend the TerraUSD (UST) peg between 8 and 12 May 2022.

The purpose of the report carried out by JS Held together with Luna Foundation Guard (LFG) and Terraform Labs (TFL) was to bring transparency to the peg’s defense activity in May 2022, and in addition, to defend against allegations made on social media. 

To help with the audit, JS Held had access to on-chain wallets and trading accounts on CEXs used by the peg defense and worked with primary raw data instead of relying solely on TFL’s representations. No compensation paid to JS Held was contingent on positive results.

JS Held, highlighted two important points in the report related to spending made in the defense effort:

  • Luna Foundation Guard spent $2.8 billion (80,081 Bitcoin and $49.9 million in stablecoins) to defend the Peg, in line with the tweets of 18 May;
  • In addition, TFL went much further and spent $613 million of its own capital to defend the UST peg

The report helped to drop all the charges presented at the time of the collapse of the Terra ecosystem because it intended to show how and why the money was spent by LFG.

So, there can be no question of misappropriation or misuse of the funds, because they were only used for the defense of the stablecoin. The entire peg defense occurred in the open markets, with no special preferences for any party. All LFG funds are held in self-hosted wallets, have not moved since the 16 May tweet, and have not been frozen.

Luna’s collapse is not similar to the recent failures of other crypto, TFL’s founder explains:

“While there have been a number of recent failures in cryptocurrencies, it is important to distinguish between the case of Terra, where a transparent, open source decentralized stablecoin failed to maintain peg parity and its creators spent proprietary capital trying to defend it, and the failure of centralized custody platforms where its operators abused other people’s money (client funds) for financial gain. We hope this report shows our organizations’ commitment to transparency and the broader crypto ecosystem, and we are more committed than ever to learn from our failure and continue to build more transparent, decentralized and resilient systems.”

According to Do Kwon, it is important to specify that there is a huge difference between what is happening now with the failure of FTX and the collapse of the Terra ecosystem. Terra’s stablecoin was decentralized and transparent, unlike what is happening now. 

The executive, who received Interpol’s red notice, said that both TFL and LFG did everything within their resources to prevent such an outcome, while this is not the case with the centralized custodial platforms whose operators abused customer funds.

Why Luna collapsed

In May 2022, TerraUSD’s deposits on Anchor suddenly began to be withdrawn, collapsing from 14 billion down to 3 billion, then falling even further.

Do Kwon, Terra’s founder, immediately thought it was a conspiracy, given how quickly the funds dissolved. 

As a result, even the algorithm that was designed to keep the price fixed failed to react in time: on 10 May 2022, the value of UST dropped to 70 cents.

The goal of Terra’s executives was to identify economic resources as soon as possible to save the entire ecosystem. In the days that followed, the stablecoin fell further down to 16 cents.

A domino effect was created among the cryptocurrencies in the Terra ecosystem; the relationship between them was strong enough that their capitalization fell to an all-time low, marking the collapse of Luna and Terra.

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