Luna Burned Through $2.8 Billion Trying to Defend UST’s Dollar Peg: Recent Audit

Luna Foundation Guard (LFG), the company behind Terra, had spent over $2.8 billion worth of crypto assets to try and defend the algorithmic stablecoin TerraUSD (UST) back in May 2022. A third-party Jericho-based auditing firm, JS Held, found out recently. In addition, Terraform Labs (TFL), another entity behind TerraUSD and other tokens in the Terra ecosystem, had spent over $600 million to defend UST’s peg.

However, the algorithmic stablecoin fell to an absolute zero, and a crypto ecosystem worth over $60 billion met its demise. The collapse of Terra shook the industry, with several investors losing faith in other stablecoins cryptocurrencies. The values of leading currencies like Bitcoin and Ethereum were impacted as well. Industry experts questioned the reliability and relevance of cryptocurrencies.

An algorithmic stablecoin like UST functions by maintaining a stable valuation, primarily by replicating other coins whose worth does not fluctuate as rapidly as crypto. A prime example can be fiat currencies like the US dollar or the British pound. The stable valuation of these coins boosts investor confidence and draws more people into the decentralized economy.

The Terra Luna logo

TerraUSD, as the name suggests, was pegged against the US dollar. It was an algorithmic stablecoin that would burn underlying Terra assets to maintain its dollar peg. The process works through market forces.

However, the recent audit hints at similarities between the fall of Terra and FTX, a leading cryptocurrency exchange. However, Do Kwon, the founder of TFL, has commented on how Terra’s steps fundamentally differ from the fraudulent activities FTX has been accused of.

While there have been multiple recent failures in crypto, it is important to distinguish between Terra’s case, where a transparent, open-source decentralized stablecoin failed to maintain peg parity and its creators spent proprietary capital to try to defend it, and failure of centralized custodial platforms where its operators misused other people’s money (customer funds) for financial gain.

Do Kwon, founder of Terraform Labs

Terra and FTX are two of the largest catastrophes in 2022’s crypto world. While Sam Bankman-Fried, founder of FTX, is currently being investigated for massive holes in his company’s proceeds, Do Kwon’s location is unknown after Singapore announced the crypto magnate is not in the city-state.

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