Terra’s native stablecoin, TerraUSD (UST), was once considered an engineering marvel in the blockchain industry. With its unique dual token system, it behaved like any other stablecoin that tracked the price of the U.S. dollar, but without any real money reserves to back it up. However, recent revelations tell an entirely different story.
Trading on the sly to prop up the U.S. dollar’s parity?
According to a complaint filed Thursday by the Securities and Exchange Commission (SEC), TerraUSD (UST) was backed at least once in May 2021 not by its algorithm, but rather by the intervention of a “third party“, which has committed to purchase substantial amounts of UST to restore the $1 peg.
The most recent information names Jump Trading as the third party. However, as of this writing, the SEC has not filed a complaint against Jump and has not charged it with any regulatory violations. TerraUSD, commonly known by its ticker UST, suffered a catastrophic failure in May 2022, causing investors to lose tens of billions of dollars. Nevertheless, these SEC allegations relate to a de-pegging that occurred a year earlier. Central to these allegations was the claim that Terraform Labs used human traders to support its value rather than the software algorithm that purported to support the system.
In its formal complaint, the SEC was quoted as saying:
In May 2021, when the value of the UST became “uncoupled” from the U.S. dollar, Terraform, through Kwon, secretly discussed plans with a third party, the “American trading company“, to purchase large quantities of UST to restore its value.
It was also alleged that when the price of UST recovered as a result of these attempts, defendants falsely and misleadingly represented to the public that the UST algorithm had actually caught up with UST to the dollar.
Luna as an offset
Terrraform Labs, however, reportedly promised to pay back in the form of LUNA tokens in exchange for Jump’s massive purchase of over 62 million USTs to support stablecoin. Even when the crypto-currency was trading at over $90 on the crypto-currency market, Terraform Labs sold it to Jump for just $0.40, which represented a profit of nearly $1.28 billion for the company. But, the terms of the deal were further enhanced by Terraform to help maintain TerraUSD, according to the SEC. The trading company would now regularly collect tokens at a price of 40 cents for LUNC (formerly LUNA).
The inefficiency of the algorithm behind UST became apparent about a year later when, in the absence of Jump’s intervention, the stablecoin lost its value and entered a death spiral, destroying both UST and its sister altcoin LUNA.