The Luna Foundation Guard (LFG) announced on May 16 that it had used more than $3 billion in bitcoins to try and save its stablecoin TerraUSD from collapse, to no avail. Of the 80,394 bitcoins the foundation had, it only had 313 left as of Monday.
80,000 bitcoins spent in vain
$3 billion was spent to avoid the collapse of the stablecoin TerraUSD and Luna, the cryptocurrency it is backed by. As a reminder, on May 12, both digital assets crashed. The value of TerraUSD, which was to be pegged at $1, fell 99.8% to stabilize around $0.15. As for the Luna, the cryptocurrency is now worth almost nothing, dropping from 80 euros to 0.0001 cents.
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In an attempt to avert this catastrophe, the LFG said it transferred 50,000 bitcoins on May 8 to trade with a counterparty. She declares in a twitter thread that the funds have been used directly to execute on-chain trades and that the bitcoins transferred to a counterparty enabled them to transact in large quantities and at short notice with the Foundation “. She adds that on May 12, an additional 30,000 bitcoins were sold by Terraform Labs, the company behind the Luna, “ in a last ditch effort to maintain its price “.
Too late, these attempts proved unsuccessful. Investors had already started to liquidate their stocks of TerraUSD and Luna, causing a snowball effect.
But what happened?
If the TerraUSD stablecoin, thought to bring stability to the cryptocurrency market, has collapsed, it is because it is not backed by a fiat currency unlike other stablecoins.
According to The Register, TerraUSD is an algorithmic stablecoin created to trade for Luna tokens. The two assets were linked by a smart contract that was supposed to keep the price of TerraUSD close to the dollar without a reserve of fiat currency.
Explanatory documents du Luna present the protocol as follows: the Terra protocol (Editor’s note, second name of Luna) uses fundamental market forces of supply and demand to maintain Luna’s price. When the demand for Luna is high and the supply is limited, its price increases. When the demand for Luna is low and the supply is too large, its price decreases. The protocol ensures Luna’s supply and demand are always balanced, leading to a stable price. “.
This created opportunities for arbitrage, an investment strategy that takes advantage of the price difference of several markets to generate profit. So, some people have found a way to make a profit by trading these tokens on Anchor, one of the three main protocols in the Luna ecosystem. The latter reimburses 20% interest to its users, allowing the clever few to make a profit of 20 cents on each token traded.
On May 7, $2 billion worth of TerraUSD was traded from the Anchor protocol resulting in a much larger supply than demand and therefore a drop in the interest rate. In a panic, investors attempted to exchange their stablecoins for Luna, but the blockchain was overwhelmed with requests and both digital assets collapsed.
This crash in the cryptocurrency sector served as a textbook case of the volatility of this market. Janet Yellen, Secretary of the United States Treasury, addressed Congress to express the need for a regulatory framework for this type of financial practice.