Terra’s homegrown stablecoin, TerraUSD (UST), was once touted as an engineering marvel in the blockchain field. With its unique, dual token system – it behaved like any other stablecoin that tracked its price American dollar–but with no actual cash held in reserve to back it up. However, recent revelations tell a completely different story.
Jump Trading Propping UST Peg?
According to a Securities and Exchange Commission (SEC) complaint filed on Thursday, TerraUSD (UST) was propped up at least once in May 2021 not by its algorithm, but by the intervention of a “third party” who committed to buy significant amounts UST to restore bond $1.
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The latest information states that Jump Trading is the third party. However, as of this writing, the Securities and Exchange Commission has not filed charges against Jump or accused it of violating any regulations. TerraUSD, which is commonly referenced by the UST index, suffered a catastrophic failure in May 2022, causing investors to lose tens of billions of dollars. However, these allegations by the Securities and Exchange Commission relate to a disconnection that took place a year earlier. The allegation that Terraform Labs used human traders to support its value rather than the software algorithm it claimed supported the system was at the heart of these claims.
In its official complaint, the SEC said:
In May 2021, when the value of UST became “de-linked” from the US dollar, Terraform, through Kwon, secretly discussed plans with a third party, the “US trading company”, to buy large quantities of UST to restore its worth.
He further alleged that when the price of the UST rose again as a result of these efforts, the defendants falsely and misleadingly represented to the public that the UST algorithm had effectively re-linked the UST to the dollar.
Luna as compensation
Terraform Labs, however, reportedly promised to pay back in the form of LUNA tokens in exchange for Jump’s bulk purchase of over 62 million UST to support the stablecoin. Even when the cryptocurrency was trading for more than $90 on the crypto market, Terraform Labs would sell it to Jump for only $0.40, resulting in a profit of nearly $1.28 billion for the company. However, the terms of the deal were further strengthened by Terraform in order to help preserve TerraUSD, according to the SEC. The trading company would now regularly collect tokens at a simple LUNC (formerly LUNA) price of forty cents.
The ineffectiveness of the algorithm that supported UST became apparent about a year later when, absent Jump’s intervention, the stablecoin went offline and went into a death spiral, destroying both UST and its sister altcoin LUNA in the process.
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