Shalini Nagarajan

Terraform Labs&#8217; new interim CEO is leaving the door open for the return of Do Kwon, but has a mammoth task ahead if he&#8217;s to revitalize the company behind failed stablecoin Terra (<a href="https://blockworks.co/price/ust" target="_blank" rel="noreferrer noopener">UST</a>). 



After UST depegged from the dollar — dragging swathes of the crypto industry down with it — the Terra community charted a fresh course without algorithmic stablecoins.



Terraform’s new CEO, Chris Amani, previously served as chief operating officer after joining in Jan. 2022, about four months before UST’s crash. According to <a href="https://www.linkedin.com/in/chrisamani/" target="_blank" rel="noreferrer noopener">LinkedIn</a>, Amani has been in his new leadership role since April. 



“TFL&#8217;s mission is to execute Terra&#8217;s rebuild alongside [the community],” Amani said in a statement.



Before they imploded, Luna and UST were among the top 10 cryptocurrencies by market cap, together worth about $40 billion. Today, the original tokens are worth less than $700 million. The new version of the Luna cryptocurrency is valued at around $200 million. None have solidified gains over the past year.



Amani may well have been scrutinized as part of wider investigations into the Singapore-headquartered startup, but he was not individually charged with fraud.



Neither have the 15 other employees who chose to stay with the company, Blockworks understands. There’s now 40 employees overall.



Amani’s <a href="https://www.prnewswire.com/news-releases/terraform-labs-appoints-former-coo-chris-amani-as-interim-ceo-301880860.html" target="_blank" rel="noreferrer noopener">appointment</a> follows co-founder <a href="https://blockworks.co/news/do-kwon-arrested" target="_blank" rel="noreferrer noopener">Kwon’s March arrest in Montenegro</a> for falsifying travel documents. Kwon faces separate <a href="https://blockworks.co/news/do-kwon-indicted-for-fraud" target="_blank" rel="noreferrer noopener">charges</a> of securities, wire and commodities fraud in the US.



<h2 class="wp-block-heading">Terra community wants to rebuild, with or without Kwon</h2>



The Terra community has diminished in size from what it once was, but remaining members still appear enthusiastic.



It’s surely an uphill battle. There’s only $6.1 million in total value locked inside the new Terra blockchain, per <a href="https://defillama.com/chains" target="_blank" rel="noreferrer noopener">DeFiLlama</a>, ranking it 68th alongside other networks. The original Terra chain had $20 billion TVL just before UST collapsed.



Some ongoing Terra projects include NFT marketplace Necropolis, Eris Protocol, which offers various DeFi products including liquid staking derivatives, and Enterprise Protocol, which aims to make DAO creation and management easy. 



An upcoming tool named Feather, said to be Kwon’s brainchild, aims to streamline blockchain creation, enabling developers to deploy a customized network in minutes. The name reflects its aspiration to make launching a blockchain as light as a feather.



During a Thursday <a href="https://twitter.com/i/spaces/1BRJjZZynljJw" target="_blank" rel="noreferrer noopener">Twitter Spaces</a>, Amani acknowledged Terraform&#8217;s shortcomings in communication regarding its latest moves.



He said that whenever Terraform attempted to make progress, they faced accusations that derailed their efforts. But Amani expressed confidence in the vision they now have moving forward.



“We have seven to eight different projects in some phase of development or ideation,” he said, mentioning that more details would be shared in the coming months. The company says it’s actively seeking ecosystem partners with whom to collaborate.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">I appreciate all of the support today. Join us tomorrow to talk about what is next for Terra and TFL.<a href="https://t.co/00IptdJaMb">https://t.co/00IptdJaMb</a>&mdash; Chris Amani (@fleece_cannon) <a href="https://twitter.com/fleece_cannon/status/1681793646750994432?ref_src=twsrc%5Etfw">July 19, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Amani also acknowledged it will be hard for the Terra community to rebuild after the “long, strange journey since the depeg.”



“There’s not a ton of liquidity, all our DeFi apps are having to compete with risk-free rate of return that’s fairly compelling right now, and it’s going to be a challenge,” Amani said.



All developments will be focused on providing utility for Luna, so there are no plans for new tokens, according to the CEO.



After the Spaces, conversations on Terraform&#8217;s Discord channel showed a positive sentiment regarding the company&#8217;s plans.



Asked whether founder Kwon is welcome back to Terra, Amani said: “Of course he’s welcome back, that’s not even a question. It could be 10 years from now.”



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algorithmic stablecoin

‘Of course Kwon is welcome back,’ says Terra interim CEO

Jump Trading is facing a fresh class action lawsuit that accuses the firm of purchasing substantial quantities of algorithmic stablecoin <a href="https://blockworks.co/tag/ust" target="_blank" rel="noreferrer noopener">UST</a> to manipulate its value toward $1, thereby misleading investors about its true price and risks associated with the token.



The Chicago trading giant allegedly played a role in aiding and abetting a fraudulent scheme involving Terra, resulting in financial losses of at least $40 billion for investors who put their money into related cryptocurrencies, per the class-action.



New Jersey-based resident Taewoo Kim filed the <a href="https://www.scribd.com/document/644577737/Taewoo-Kim-et-al-v-Jump-Trading#download&amp;from_embed" target="_blank" rel="noreferrer noopener">lawsuit</a> on May 9 on behalf of affected investors, claiming that Jump Trading was an early partner and financial supporter of Terraform Labs.



Starting around Nov. 2019, negotiations between former Terraform CEO Do Kwon and Jump were said to result in a series of agreements.&nbsp;



As part of these, TFL loaned 30 million LUNA tokens to Jump, enabling them to provide market-making services for LUNA and UST, according to the lawsuit. In return, Jump was entitled to compensation, which included receiving LUNA tokens at a significantly discounted rate, it&#8217;s alleged.



Subsequently, the value of UST experienced an unexpected decline and fell below $1 on May 19, 2021, plunging by 10% — about one year before Terra&#8217;s cataclysmic implosion, when it <a href="https://blockworks.co/news/one-year-since-terra" target="_blank" rel="noreferrer noopener">crashed to zero</a>.



The lawsuit alleges that not long after, on May 23 that year, Kwon and Jump conspired to artificially inflate the prices of UST and aUST (a token used on Terra’s lending platform, Anchor). This was apparently accomplished through Jump’s covert purchase of large quantities of UST, temporarily restoring the false appearance of UST’s $1 peg.



<h2 class="wp-block-heading">&#8216;Unnamed US trading firm&#8217; cited in SEC indictment</h2>



The lawsuit alleges TFL, Jump and Jump Crypto President Kanav Kariya misrepresented UST’s &#8220;re-peg&#8221; as restored by TF ofL’s algorithm, misleading the market about UST’s value and risks. 



Supporting claims made in Kwon’s <a href="https://www.sec.gov/litigation/complaints/2023/comp-pr2023-32.pdf" target="_blank" rel="noreferrer noopener">criminal SEC indictment</a> filed in Feb., it’s worth noting that he allegedly sought assistance from an unnamed US trading firm to manipulate the market price of UST. Taewoo Kim’s lawsuit speculates the unnamed firm is Jump Trading.



The lawsuit specifically claims between May 23 and May 27, 2021, Jump Trading engaged in significant net purchases of over 62 million UST tokens. These trades were conducted across multiple cryptocurrency trading platforms in order to conceal Jump&#8217;s manipulative actions. 



To compensate Jump for its supposedly secret manipulation of UST and aUST, TFL agreed to transfer 61.4 million LUNA to Jump at a fixed price of $0.40 per token under an agreement signed July 2021. The arrangement was to remain in effect for the next four years, regardless of LUNA’s actual market value, which sometimes exceeded $90 per token in secondary markets. 



<figure class="wp-block-embed is-type-wp-embed is-provider-flourish wp-block-embed-flourish"><div class="wp-block-embed__wrapper">
<iframe loading="lazy" class="wp-embedded-content" sandbox="allow-scripts" security="restricted" title="Interactive or visual content" src="https://flo.uri.sh/visualisation/13735114/embed#?secret=rIEA6fQHH9" data-secret="rIEA6fQHH9" frameborder="0" scrolling="no" height="575" width="700"></iframe>
</div><figcaption class="wp-element-caption">LUNA skyrocketed before crashing to zero</figcaption></figure>



As a result of this scheme, Jump is said to have made a staggering profit of more than $1.28 billion by selling the heavily discounted LUNA tokens it had acquired through the modified agreement.



Blockworks has not verified the veracity of the allegations contained within the lawsuit and makes no claims of wrongdoing. We&#8217;ve reached out to Jump and Kariya for comment.



The lawsuit reads: &#8220;Plaintiff’s allegations are based upon personal knowledge as to himself and his own acts, and upon information and belief as to all other matters based on the investigation conducted by and through Plaintiff’s attorneys, which investigation included, among other things, a review of the whitepaper of the digital assets at issue, press releases, media reports, and other publicly disclosed reports and information about Defendants.&#8221;



<h2 class="wp-block-heading">Jump reportedly less keen on crypto these days</h2>



Despite constant allegations, Kwon himself has denied the possibility of manipulation.&nbsp;



The lawsuit pointed out a series of tweets from Kwon on May 23, 2021, in which he dismissed allegations of UST price manipulation.



The lawsuit further claims that the defendants continued to hide their misconduct even after the collapse of UST in May 2022.



Kim claims he made purchases of UST and aUST at a time when the prices had been manipulated by Jump. He seeks appropriate damages to be determined at trial.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">1/ It’s interesting that cockroaches only come out when the night is darkest. This thread should help you understand what’s been going on &amp; how the protocol(s) have responded recently:&mdash; Do Kwon 🌕 (@stablekwon) <a href="https://twitter.com/stablekwon/status/1396368169091043328?ref_src=twsrc%5Etfw">May 23, 2021</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Jump Trading’s crypto division is reportedly scaling back its operations in the US market due to increased regulatory actions targeting the crypto industry, Bloomberg <a href="https://www.bloomberg.com/news/articles/2023-05-09/jane-street-jump-pull-back-crypto-trading-amid-us-crackdown" target="_blank" rel="noreferrer noopener">reported</a> on May 10.&nbsp;



The firm is still said to be in the game of market-making, albeit on a smaller scale, but doesn’t plan to ditch crypto entirely.



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Jump Earned $1.3B By Manipulating Terra, Lawsuit Alleges

Sebastian Sinclair

Hong Kong’s Monetary Authority is weighing whether to implement or amend existing legislation that would effectively ban algorithmic stablecoins within the special administrative region.



The regulatory framework will focus on several key principles, including comprehensive regulation in areas such as ownership, governance and asset management.



Stablecoins that derive their value based on arbitrage or an algorithm will not be accepted into the region’s proposed licensing regime, the central bank said in a conclusion to a previously issued <a href="https://www.hkma.gov.hk/media/eng/doc/key-information/press-release/2023/20230131e9a1.pdf" target="_blank" rel="noreferrer noopener">discussion paper</a> on Monday.



The collapse of the Terra ecosystem in May 2022, after infamous algorithmic stablecoin Terra USD (UST) lost its US dollar peg, drew the ire of regulators worldwide. It’s that type of “financial stability risks” the central bank is hoping to contain, it said.



Financial resources requirements, risk management, anti-money laundering, counter-terrorist financing, user protection, regular audits and disclosure requirements are also being considered.



It comes after a discussion paper was issued on the subject in January of last year, which received 58 submissions from stakeholders.&nbsp;



The new law would apply to all entities operating within the jurisdiction, including those conducting a regulated activity and those actively marketing such activity to the public.&nbsp;



Stablecoins targeting the value of the Hong Kong dollar would also fall under the law’s purview.



The value of reserve assets will be required to meet the value of the outstanding stablecoins at all times, and those assets will be required to possess “high quality and high liquidity.”



“Stablecoin holders should be able to redeem the stablecoins into the referenced fiat currency at par within a reasonable period,” the regulator said.



Further detailed consultations with more precise information about the regime will be conducted sometime this year or early next year, according to the discussion paper.



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Hong Kong Contemplates Ban on Algorithmic Stablecoins

<div id="highlights-block_6357b63652665" class="highlights">
 <ul>
 <li>USN became “susceptible to undercollateralization during extreme market conditions,” NEAR said</li>
 <li>The situation will make it hard for projects to maintain long-term interest in their algorithmic stablecoins, a crypto exec said</li>
 </ul>
 
</div>



NEAR Protocol is attempting to avoid another <a href="https://cms.blockworks.co/tag/terra" target="_blank" rel="noreferrer noopener">Terra-like</a> situation.



The protocol’s native stablecoin USN, which had a trading volume of <a href="https://www.coingecko.com/en/coins/usn" target="_blank" rel="noreferrer noopener">$9.7 million</a> in the last 24 hours, is gradually winding down due to risks of undercollateralization, <a href="https://near.org/blog/statement-in-full-near-foundation-to-fund-usn-protection-programme/" target="_blank" rel="noreferrer noopener">NEAR</a> said in a statement on Monday.



NEAR is a blockchain project that seeks to rival layer-1 protocols including Solana and Ethereum. It launched its own algorithmic stablecoin, issued by Decentral Bank (DCB), in April.



But after the stunning <a href="https://cms.blockworks.co/cryptocurrency-luna-lurches-as-terra-usd-volatility-continues-erasing-billions/" target="_blank" rel="noreferrer noopener">collapse</a> of Terraform Labs’ stablecoin TerraUSD (UST) in May, which wiped out more than $200 billion in the space, NEAR’s native-stable coin was made to transition to a non-algorithmic version backed by Tether (USDT) tokens, owing to potential risks.



Since USN was originally an algorithmic stablecoin, it became prone to undercollateralization during extreme market conditions, according to Decentral Bank. A separate double-minting issue also contributed to the undercollateralization, meaning there wasn’t sufficient collateral to back the token.



<h3 class="wp-block-heading">NEAR to use $40 million to protect investors affected by USN shutdown</h3>



The NEAR Foundation pegged the known collateral gap at $40 million, saying the imbalance “cannot expand further assuming DCB burns/destroys all the double-minted USN and promptly winds down the project in an orderly manner.”



It clarified that the gap is not associated with its native token NEAR, which provides utility within the protocol, and set aside $40 million in fiat currency to fund a “USN Protection Programme.”



<h3 class="wp-block-heading">Rough times for algorithmic stablecoins</h3>



Most stablecoins are backed by an asset like fiat currency or physical assets like gold. But algorithmic stablecoins aren’t backed by external assets, rather they rely on specific instructions to help the coin maintain its peg. Similarly, UST was not backed by the US dollar, instead using financial engineering with sister token LUNA to maintain its links to the dollar.



Jamie Thomson, CEO of NFT gaming studio Vulcan Forged, pointed out the disadvantages of algorithmic stablecoins: the lack of real asset backing means price stability isn’t guaranteed.



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“People were skeptical of algorithmic stablecoins after TerraUSD crashed, but now that NEAR protocol has closed its stablecoin, they have more evidence,” he told Blockworks via email.&nbsp;</blockquote>



“Where there are market movements traders could get profits, but it’s clear it will be now even harder for projects to maintain long-term interest in their algorithmic stablecoins,” Thomson added.



Although the NEAR Foundation believes its collateral gap can be contained, concerns over the future of stablecoins remain.&nbsp;



NEAR Foundation didn’t return Blockworks’ request for comment by press time.



Even one sign of weakness or a systemic issue is enough for a large-scale loss of trust, according to Simon Schaber, the chief business development officer at Spool.



Despite concerns over their critical characteristics, <a href="https://cms.blockworks.co/?s=beanstalk" target="_blank" rel="noreferrer noopener">Beanstalk</a> is among the algorithmic stablecoins still standing. The Ethereum-based stablecoin protocol suffered a $180 million exploit in April, but <a href="https://cms.blockworks.co/algo-stablecoin-protocol-beanstalk-relaunches-following-180m-hack/" target="_blank" rel="noreferrer noopener">resumed services</a> four months later. 



&#8220;Beanstalk uses a different mechanism than USN to create price stability. Bean, the stablecoin issued by Beanstalk, is backed by credit rather than any form of collateral,&#8221; a spokesperson told Blockworks.



This report was updated on Oct. 26 at 8:33 am ET to include Beanstalk&#8217;s comment.



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NEAR Nixes Algorithmic Stablecoin USN

Jack Kubinec

<div id="highlights-block_63357f673fcc0" class="highlights">
 <ul>
 <li>Tether, Circle, and Binance still make up 90% of stablecoins</li>
 <li>“The future is an uncollateralized stablecoin,” a decentralized stablecoin founder said</li>
 </ul>
 
</div>



Stablecoin issuers have gotten pretty good at explaining what differentiates their token from Terra’s failed experiment in recent months, as they seek to fill Terra&#8217;s void while avoiding its reputation.&nbsp;



After the algorithmic stablecoin lost its dollar peg and death spiraled $30 billion in a matter of days, <a href="https://cms.blockworks.co/terra-collapse-could-spell-end-for-algorithmic-stablecoins/" target="_blank" rel="noreferrer noopener">Terra</a> set off the crypto crash that took down giant centralized crypto firms Voyager, Celsius, and hedge fund Three Arrows Capital earlier this year.&nbsp;



Non-volatile tokens are crucial for crypto adoption, and a bevy of stablecoin projects are attempting to attain Terra-like levels of support while simultaneously trying to distance themselves from Terra comparisons.



Stablecoins create a pretty compelling case for investors: attain the stability of fiat currencies with the advantages of programmable money crypto provides.&nbsp;



But after Terra collapsed, “there’s more skepticism” being shown toward stablecoins, Sam Kazemian, founder of the decentralized Frax stablecoin, told Blockworks.&nbsp;



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“It’s unfortunate it had to happen after the whole Terra situation, but there&#8217;s got to be a little bit more discipline” on the part of stablecoin issuers, Kazemian said.</blockquote>



After a period of rapid adoption from 2019-2021, stablecoins have become a crypto staple. Three of the top seven cryptocurrencies <a href="https://coinmarketcap.com/all/views/all/">by market cap</a> are stables: Tether (USDT), US Dollar Coin (USDC), and Binance USD (BUSD). The market is top-heavy, though — the three leading stablecoins make up 90% of the total stablecoin market cap, <a href="https://defillama.com/stablecoins">per DeFiLlama</a>.



The three major stablecoins are collateralized, meaning fiat assets are custodied for every stablecoin in circulation, and centralized, meaning they are managed off-chain by private companies.



<h3 class="wp-block-heading">The return of the algos&nbsp;</h3>



There is little appetite among policymakers to indulge the fancy economic experiments of some algorithmic or crypto-collateralized stablecoins. According to a draft US House of Representatives bill, Congress is even considering legislating a 2-year moratorium on, what the draft terms, “endogenously collateralized stablecoins,” <a href="https://www.bloomberg.com/news/articles/2022-09-20/house-stablecoin-bill-would-put-two-year-ban-on-terra-like-coins" target="_blank" rel="noreferrer noopener">Bloomberg reported</a>.



Only those fully backed with collateral overseen by regulators — like Circle’s USDC — need apply. Although, this approach is still far from becoming law.



Publius, the pseudonymous founder of stablecoin issuer <a href="https://cms.blockworks.co/hacked-stablecoin-beanstalk-raises-9m-for-market-protocol/" target="_blank" rel="noreferrer noopener">Beanstalk</a>, thinks the stablecoin giants will hit a ceiling where it becomes unprofitable to fully back the tokens.



Therefore, uncollateralized stablecoins with novel spins on the Terra’s algorithmic ilk may yet become necessary for growth as DeFi leaves finance’s fringe, he said.



“It&#8217;s really hard to lock up a trillion dollars or more of collateral,” Publius said.



Though, with 2-year US Treasury bond yields <a href="https://ycharts.com/indicators/2_year_treasury_rate" target="_blank" rel="noreferrer noopener">above 4%</a>, the Circle cash stash looks like quite an asset.



In a testament to Terra’s continued pariahdom, the term “algorithmic” has disappeared from the stablecoin space, with Near, Shiba Inu, and Thorchain <a href="https://twitter.com/DefiIgnas/status/1559857962457628672" target="_blank" rel="noreferrer noopener">all sunsetting or renaming</a> their algorithmic stables.&nbsp;



But it’s more efficient not to overcollateralize stablecoins with deadweight dollars, and emerging stablecoins — like DeFi lending platforms <a href="https://cms.blockworks.co/aave-dao-approves-crypto-backed-stablecoin-gho/" target="_blank" rel="noreferrer noopener">Aave</a> and <a href="https://www.coindesk.com/tech/2022/09/07/defi-platform-curve-finance-takes-first-steps-toward-crvusd-stablecoin/" target="_blank" rel="noreferrer noopener">Curve</a>’s forthcoming offerings — tend to not fully back their tokens in the same way as their fully-collateralized peers.



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“The future is an uncollateralized stablecoin,” Publius said.</blockquote>



“It’s still the fiat coin era [while users onboard to crypto]” Kazemian said. “The long game” involves “stablecoins that are decentralized, on-chain, and pegged to a basket of consumer items [rather than a fiat currency].”



However, given the political realities in both the US Congress and <a href="https://cms.blockworks.co/eu-crypto-lobby-fights-mica-limits-on-us-dollar-stablecoins/" target="_blank" rel="noreferrer noopener">the EU</a>, novel stablecoins may find it difficult to gain adoption.



Additional reporting by Macauley Peterson.

Playing the ‘We’re Not Terra’ Stablecoin Game

<div id="highlights-block_632822f7760fb" class="highlights">
 <ul>
 <li>South Korean prosecutors have issued arrest warrants for multiple Terraform insiders including CEO Do Kwon</li>
 <li>They were believed to be in Singapore, but police have said Kwon is currently not in the city-state </li>
 </ul>
 
</div>



Do Kwon, rumored to have been living in Singapore since his crypto project Terra collapsed, now claims he isn’t evading authorities and wants to clarify “the truth&#8221; about what happened.



In a <a href="https://twitter.com/stablekwon/status/1571197156907679745" target="_blank" rel="noreferrer noopener">series of tweets</a> on Saturday, the Terra and Luna founder said he&#8217;s open to providing details about his location to certain people and further shed light on what he&#8217;s been up to.



South Korean prosecutors said on Sunday that Kwon was “obviously on the run” and isn’t cooperating, according to <a href="https://en.yna.co.kr/view/AEN20220918001300315?section=national/national">Yonhap News</a>. They said Kwon flew to Singapore in April to evade investigation and dissolved the firm’s Korean-based Terra branch.



&#8220;I am not &#8216;on the run&#8217; or anything similar,&#8221; Kwon wrote. &#8220;For any government agency that has shown interest to communicate, we are in full cooperation and we don’t have anything to hide.&#8221;<a href="https://twitter.com/stablekwon/status/1571197156907679745"></a>



“We are in the process of defending ourselves in multiple jurisdictions — we have held ourselves to an extremely high bar of integrity, and look forward to clarifying the truth over the next few months.&#8221; He closed his tweet thread with &#8220;Cheers!&#8221; and an emoji of two wine glasses clinking.



Last week, a court issued the Seoul Southern District Prosecutor’s Office six <a href="https://cms.blockworks.co/south-korea-issues-arrest-warrant-for-terra-ceo-do-kwon-report/" target="_blank" rel="noreferrer noopener">arrest warrants</a> for former employees working at the startup, including Do Kwon and financial officer Han Mo, over alleged breaches of securities and capital markets law.



Their information was also sent to Interpol member states via a Red Notice, enabling their arrest in multiple jurisdictions. Exact losses felt by Terra investors are difficult to calculate, but terraUSD and its sister token luna were together worth more than $41 billion just before they imploded.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Really don’t understand why otherwise would be true &#8211; think about whether you would be comfortable with the same level of invasion of privacy for yourself&mdash; Do Kwon 🌕 (@stablekwon) <a href="https://twitter.com/stablekwon/status/1571197154256887808?ref_src=twsrc%5Etfw">September 17, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



According to South Korean reports, all wanted individuals were residing in Singapore at the time the arrest warrants were issued. But Singapore police told <a href="https://www.reuters.com/technology/singapore-police-says-wanted-crypto-developer-do-kwon-is-currently-not-singapore-2022-09-17/" target="_blank" rel="noreferrer noopener">Reuters</a> on Saturday that Kwon is currently not there. They added they would help South Korean prosecutors within their authorized scope and international obligations, but didn’t clarify the whereabouts of the others.



It would be difficult for Kwon to travel from wherever he may be at the moment as prosecutors are also in the process of <a href="https://cms.blockworks.co/terraform-ceo-do-kwons-passport-targeted-after-arrest-warrant-report/">invalidating</a> his passport. Still, that process may be delayed as South Korean authorities were coordinating with Singapore for the return of five passports belonging to Terraform affiliates. 



Kwon joked <a href="https://twitter.com/stablekwon/status/1571200436274700291">in a tweet</a> that he hadn’t been running for sometime now and should possibly start. “Tbh [to be honest, I haven&#8217;t] gone running in a while, need to cut some calories.”



So, at this stage, Kwon&#8217;s whereabouts remain a mystery.



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Where in the World is Do Kwon? Terra CEO Says ‘I’m Not On The Run’

<div id="highlights-block_6321877e7c081" class="highlights">
 <ul>
 <li>Arrest warrants for Do Kwon and other key Terra employees will be sent to the Interpol Red Notice system</li>
 <li>Kwon is believed to be residing in Singapore but could face extradition to South Korea</li>
 </ul>
 
</div>



A South Korean court has issued an arrest warrant for Terraform Labs founder Do Kwon, some four months after the <a href="https://cms.blockworks.co/?s=Terra" target="_blank" rel="noreferrer noopener">Terra</a> ecosystem’s implosion.



Local outlet Chosun <a href="https://www.chosun.com/national/court_law/2022/09/14/2YBHH4ZQKFCKBJJPENIHHQYOOQ/?utm_source=naver&amp;utm_medium=referral&amp;utm_campaign=naver-news" target="_blank" rel="noreferrer noopener">reported</a> on Wednesday that a team from the Seoul Southern District Prosecutor’s Office also issued arrest warrants for other employees, including Nicholas Platias, a former head of research at Terra, and staff member Han Mo. All three are believed to be currently residing in Singapore.



Caetano Manfrini, an attorney for Brazil-based GEMMA Ecosystem, <a href="https://twitter.com/caemanfrini/status/1569938651014111233" target="_blank" rel="noreferrer noopener">tweeted</a> that arrest warrants were issued for a total of five affiliates, including Kwon. Their information will be sent to Interpol’s <a href="https://www.interpol.int/en/How-we-work/Notices/View-Red-Notices" target="_blank" rel="noreferrer noopener">Red Notice</a>, which enables their arrest in multiple jurisdictions and could result in extradition, he added. The warrants are valid for one year.



The charges levied against them are reportedly tied to violations of capital market laws. On Monday, word <a href="https://www.koreaherald.com/view.php?ud=20220913000609" target="_blank" rel="noreferrer noopener">broke</a> that South Korean prosecutors were considering classifying Terra&#8217;s luna token as a security, which would open Kwon and other Terraform Labs developers up to violations of the country&#8217;s Capital Markets Act, formerly the Securities and Exchange Act, which regulates investment products.



The Seoul prosecutor’s office didn’t return Blockworks’ request for comment by press time.



Seoul-headquartered Terraform Labs came under investigation after the infamous fall of TerraUSD (UST), the algorithmic stablecoin that dramatically <a href="https://cms.blockworks.co/cryptocurrency-luna-lurches-as-terra-usd-volatility-continues-erasing-billions/" target="_blank" rel="noreferrer noopener">de-pegged</a> from the US dollar in May.



After its collapse, almost $45 billion was wiped off the market values of UST and its sister coin luna over just seven days, CoinGecko <a href="https://www.coingecko.com/en/coins/terra" target="_blank" rel="noreferrer noopener">data</a> showed, and triggered a liquidity crunch that contributed to bankrupting a number of crypto lenders and hedge fund firms, namely Celsius, Voyager and Three Arrows Capital.



In his <a href="https://cms.blockworks.co/do-kwon-i-think-i-should-have-known-the-risks-of-ust-much-better/" target="_blank" rel="noreferrer noopener">first interview</a> since the crash, Do Kwon said he neglected the risks of UST. “In hindsight, I think we should have been more skeptical,” he told Coinage’s Zack Guzman.



In the aftermath of the stablecoin’s toppling, prosecutors <a href="https://cms.blockworks.co/terraform-labs-employees-barred-from-leaving-south-korea/" target="_blank" rel="noreferrer noopener">blocked Terraform employees</a> from leaving South Korea during investigations. At the time, Do Kwon had already left the country and reports claimed his passport could be invalidated. During the probe, other local crypto exchanges were <a href="https://cms.blockworks.co/7-south-korean-crypto-exchanges-raided-in-connection-with-terrausd-crash-report/" target="_blank" rel="noreferrer noopener">raided</a> in order to establish possible links to Terraform Labs.



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South Korea Issues Arrest Warrant for Terra CEO Do Kwon: Report

<div id="highlights-block_62f0aa2017655" class="highlights">
 <ul>
 <li>Beanstalk said it has relaunced its protocol during its one year anniversary on the Ethereum mainnet</li>
 <li>It follows a $180 million governance exploit where a hacker managed to steal 24,830 ether and 36 million BEAN tokens</li>
 </ul>
 
</div>



Algorithmic stablecoin protocol Beanstalk said Friday it has resumed its services nearly four months after it was hacked for $180 million in crypto.



Beanstalk Farms, the self-styled “decentralized credit-based stablecoin protocol,” said it has &#8220;unpaused&#8221; its services concurrent with the one-year anniversary of its debut on the Ethereum mainnet on Aug. 6, 2021.



The protocol developers are hoping its revamped launch will help buoy issues pertaining to its security and trust following a <a href="https://cms.blockworks.co/algo-stablecoin-protocol-beanstalk-cut-down-by-governance-hijack/" target="_blank" rel="noreferrer noopener">major hack</a> on April 17.



&#8220;It’s impossible to predict how it will perform, but Beanstalk Farms’ belief in the possibilities for a permissionless fiat stablecoin is unwavering,&#8221; the group wrote <a href="https://bean.money/blog/beanstalk-one-year-anniversary" target="_blank" rel="noreferrer noopener">in a blog post</a>.



The major hack involving a <a href="https://cms.blockworks.co/algo-stablecoin-protocol-beanstalk-cut-down-by-governance-hijack/" target="_blank" rel="noreferrer noopener">governance flash loan exploit</a> saw an attacker drain 24,830 ether and 36 million BEAN tokens, worth about $180 million at the time. The protocol&#8217;s hack currently ranks as the industry&#8217;s sixth largest exploit, according to the industry tracking website <a href="https://rekt.news/leaderboard/" target="_blank" rel="noreferrer noopener">Rekt Leaderboard</a>.



&#8220;Since then, Beanstalk Farms and Bean Sprout have worked with the Beanstalk community to prepare the protocol for a safe replant and unpause,&#8221; per the post.



&#8220;The unpause was successful and Beanstalk is at peg,&#8221; a spokesperson told Blockworks via email. &#8220;During the first 24 hours of the unpause, Beanstalk was top 10 within the most activity on the Ethereum blockchain.&#8221;



Beanstalk&nbsp;is a permissionless fiat stablecoin protocol designed to utilize credit instead of collateral to issue its native stablecoin (BEAN), according to its <a href="https://docs.bean.money/" target="_blank" rel="noreferrer noopener">website</a>. 



The protocol claims its primary objective is to &#8220;incentivize independent market participants&#8221; to cross the price of 1 BEAN over its dollar peg in a &#8220;sustainable fashion.&#8221; Algorithmic stablecoins have been called into question following the <a href="https://cms.blockworks.co/tag/terra/" target="_blank" rel="noreferrer noopener">collapse of Terra&#8217;s ecosystem</a> in May.



The team behind Beanstalk <a href="https://cms.blockworks.co/hacked-stablecoin-beanstalk-raises-9m-for-market-protocol/" target="_blank" rel="noreferrer noopener">recently announced</a> a $9 million fundraise for a new protocol dubbed Root.



Updated on August 9, 2022, at 1:53 am ET: Adds commentary from Beanstalk spokesperson



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Algo Stablecoin Protocol Beanstalk Relaunches Following $180M Hack

David Canellis

<div id="highlights-block_62a1c10bb98e8" class="highlights">
 <ul>
 <li>Terra’s UST’s fate hasn’t deterred traders from experimenting with TRON-powered algorithmic stablecoin USDD</li>
 <li>Bitcoin dominance has risen 15% to almost half of the entire crypto market</li>
 </ul>
 
</div>



It’s been a month since Terra’s algorithmic stablecoin UST <a href="https://cms.blockworks.co/?s=Terra" target="_blank" rel="noreferrer noopener">de-pegged</a> from the US dollar. At the time, Terra’s native token LUNA and UST were the ninth and 10th largest cryptocurrencies by market capitalization — together valued at $42 billion. Both tokens have since evaporated almost entirely, begetting a major market shakeup.



Bitcoin dominance is on the rise and most cryptoassets are in decline, yet one exchange token has bucked the downtrend. While algorithmic stablecoins may not be completely dead, UST’s demise has changed the stablecoin landscape dramatically.



Tether (USDT) is still the largest stablecoin ($72.5 billion versus USD Coin’s $53.9 billion), but the past month was its most significant dollar-denominated reduction across its seven-year history. USDT’s supply is down 13% over the past month, the equivalent of nearly $11 billion, after big money traders flocked to redeem their tokens throughout May’s market chaos.



“The drop in USDT since the UST collapse is a reflection of the relative market confidence in its issuer Tether (based in the British Virgin Islands) compared to that of USDC (issued by the US-based Centre Consortium, founded by Circle and Coinbase),” Genesis Trading wrote in its May <a href="https://info.genesistrading.com/hubfs/monthly-reviews/2022/May-2022-Monthly-Report.pdf" target="_blank" rel="noreferrer noopener">report</a>.



Algorithmic stablecoins such as Magic Internet Money (MIM) and Frax are also significantly smaller. MIM’s total supply has shrunk 87% while Frax’s has fallen 43% — with $3.6 billion altogether leaving those two protocols.&nbsp;



MakerDAO’s DAI, while not strictly algorithmic, has given up 18% of its supply since UST de-pegged — even though it is <a href="https://daistats.com/#/" target="_blank" rel="noreferrer noopener">overcollateralized</a> on-chain by more than half. In fact, Circle’s USDC and Binance’s BUSD (issued by Paxos) are the only top 12 stablecoins not to lose market share following UST’s demise.&nbsp;



Clearly, market participants now favor asset-backed tokens — just not Tether (USDT). USDC has seen its circulating supply surge $5.4 billion, an 11% boost. BUSD grew by $555 million, about 3%.&nbsp;



But it seems some still trust algorithmic stablecoins. TRON’s Decentralized USD (USDD), launched by blockchain founder Justin Sun just days before UST crumbled, has attracted $491 million over the past month — a 230% increase in supply.



USDD holders have been able to lock their tokens inside lending platform JustLend for double-digit yield all month, a prospect which has been a <a href="https://cms.blockworks.co/every-top-cryptocurrency-is-down-except-justin-suns-tron/" target="_blank" rel="noreferrer noopener">boon</a> to TRX’s price. USDD’s market value is now $703 million, ranking it the 10th biggest stablecoin behind Waves’ Neutrino USD and ahead of Paxos’ gold-backed asset PAXG.



According to Genesis: “The jury is out on whether the UST collapse will turn out to be proof that algorithmic stablecoins are a flawed concept, or whether different design choices could be successful in the future.”



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“The event has highlighted the importance of understanding nuances in this space and that not all stablecoins are created equal.”</blockquote>



Still, the collective supply of the top 12 stablecoins at the time of UST’s de-pegging — not counting UST itself — is down by $9 billion.



<h3 class="wp-block-heading">Bitfinex’s LEO most resilient cryptoasset</h3>



According to price data reviewed by Blockworks, Bitfinex’s Unus Sud Leo (LEO) token was the best performing top 100 token (excluding stablecoins and wrapped tokens) by market value — the only token to increase in value over the month, albeit by half a percent.



Bitfinex raised $1 billion of USDT in 10 days with LEO’s private token sale in May 2019. The idea was to replace $850 million lost when the exchange’s embattled third-party payment processor Crypto Capital Corp was raided by authorities.



Bitfinex rebuys and burns LEO to reimburse investors who contributed to the sale, while regular Bitfinex users receive discounts on fees when holding LEO in their accounts. The company committed to eventually burning all one billion LEO tokens, of which it has already destroyed around 6.5% of the supply.



Crypto exchange tokens <a href="https://cms.blockworks.co/native-crypto-exchange-tokens-hint-at-first-sign-of-broader-market-recovery/">outperformed</a> much of the market in May. Many have burn mechanisms similar to LEO’s as a way to reward holders. KuCoin’s native token KCS has been the third-best top 100 crypto asset post-Terra, falling only 3.5%. But FTX’s FTT and Binance’s BNB weren’t so hot — both tanked 20%.



LEO’s price doubled earlier this year when US authorities revealed they <a href="https://cms.blockworks.co/couple-arrested-as-government-recovers-3-6b-in-stolen-bitcoin/" target="_blank" rel="noreferrer noopener">seized $3.5 billion in bitcoin</a> stolen from the exchange back in 2016. Bitfinex has said it will commit at least 80% of the recovered net funds to repurchase and burn LEO tokens within 18 months of the date of recovery.



A Bitfinex spokesperson told Blockworks LEO’s performance should be viewed as a measure of its customers’ confidence and trust in the platform.



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“We have also begun to see what may be a correlation between the performance of LEO, and the prospects of Bitfinex receiving the stolen bitcoin that was seized by the US authorities earlier this year,” they said.</blockquote>



Other top-100 tokens performing relatively well in Terra’s wake include TRX (down 3.5%) and monero (down 9%). Bitcoin came in at number five, falling 14% from nearly $35,500 to $30,400. BTC is currently range bound with no clear momentum.



Ether, on the other hand, sank 30% over the month — about average for the top 100. Bitcoin dominance rose almost 15% to now represent nearly half of the digital asset market, while ether dominance fell almost 9% to just under 18%.



On Wednesday, the second largest cryptoasset by market cap took an important step toward its planned Merge, as the Ethereum Ropsten testnet <a href="https://cms.blockworks.co/ethereum-ropsten-testnet-successfully-merged-to-proof-of-stake/" target="_blank" rel="noreferrer noopener">successfully transitioned</a> to proof-of-stake.



As for the losers: LUNA aside, the native digital asset for Terra-powered lending protocol Anchor was the worst hit, down 91%. Tokens for lending platform Convex Finance and privacy blockchain Secret Network collapsed 66% and 62% respectively, while move-to-earn project StepN fell 60%.&nbsp;



Alternative networks Oasis and Avalanche both drained by 55%, decentralized finance governance token Yearn lost 54% of its value, while metaverse project ApeCoin and layer-11 assets NEAR, MINA and solana all halved in price.



While crypto markets fell throughout April in the lead up to UST’s de-pegging, all digital assets are worth 20% less since the stablecoin went kaput, representing $336.6 billion in value lost.



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How Cryptoasset Markets Have Changed Since Terra Crash

<div id="highlights-block_6299da4fc0523" class="highlights">
 <ul>
 <li>Friday’s law states stablecoins must be linked to the yen or another legal tender</li>
 <li>Japan is among the first major economies to make clear the legal status of stablecoins</li>
 </ul>
 
</div>



Japan’s parliament passed a landmark investor protection bill Friday that sets a legal framework for stablecoins, characterizing the assets as digital currencies. 



The law states stablecoins, which are generally backed by one or more reserve assets, must be pegged to the yen or another legal tender, according to reports by <a href="https://www.bloomberg.com/news/articles/2022-06-03/japan-passes-stablecoin-bill-that-enshrines-investor-protection" target="_blank" rel="noreferrer noopener">Bloomberg</a> and <a href="https://www.ft.com/content/7f8130e9-abfa-407b-b04f-2f9f5e47d0df" target="_blank" rel="noreferrer noopener">Financial Times</a>. They must also guarantee redemption to the holder at face value.



Friday’s announcement follows the shocking <a href="https://cms.blockworks.co/luna-foundation-guard-to-support-struggling-ust-peg-with-btc-reserves/" target="_blank" rel="noreferrer noopener">crash</a> of TerraUSD (UST), over which US Treasury Secretary Janet Yellen has <a href="https://cms.blockworks.co/terra-turmoil-adds-fodder-for-secretary-yellens-concerns-over-stablecoins/" target="_blank" rel="noreferrer noopener">expressed concern</a>. However, the legislation in Japan was not in response to either algorithmic experiments or existing reserve-backed stablecoins from foreign issuers like Tether, Bloomberg reported.



Under Japan’s law, stablecoins can only be issued by established financial institutions such as registered banks, money transfer agents and trust companies.



The move to confine stablecoin issuance to licensed financial firms was expected. Joerg Schmidt, B2C2’s director of strategy, told <a href="https://cms.blockworks.co/japans-proposed-stablecoin-rules-in-line-with-international-developments/" target="_blank" rel="noreferrer noopener">Blockworks</a> late last year that this would be in line with international developments, because the US too has proposed issuance only by <a href="https://home.treasury.gov/system/files/136/StableCoinReport_Nov1_508.pdf" target="_blank" rel="noreferrer noopener">federally insured banks</a>.



Japan’s Financial Services Agency had been drawing up a framework around stablecoins even before the market’s recent downtrend. The new legal guidance will come into effect in 2023, and stablecoin issuers are expected to receive detailed information in the coming months.



Fiat-backed stablecoins are backed 1-to-1 by cash or cash-like assets held in reserve with an issuer. Meanwhile, non-collateralized algorithmic stablecoins aren’t fully backed by assets but are supposed to remain stable through mining and burning units combined with arbitrage incentives. TerraUSD was the largest such stablecoin, reaching a market cap of over $18 billion before it failed.



The UST collapse has put a fresh spotlight on stablecoins&#8217; potential threat to financial stability, as seen in the UK’s recent move to <a href="https://cms.blockworks.co/terra-collapse-sparks-stablecoin-regulation-in-the-uk/" target="_blank" rel="noreferrer noopener">line up new safeguards</a> for the assets.



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Japan Passes Legal Framework for Stablecoins

Casey Wagner

<div id="highlights-block_627c1be7d35e7" class="highlights">
 <ul>
 <li>Algorithmic incentives for stablecoin pegs remain an unsolved problem, head of portfolio management at Securitize said</li>
 <li>Regulators have promised rules to protect investors, but lawmakers haven’t yet found a path forward</li>
 </ul>
 
</div>



As Terraform Labs and community members scramble to rescue stablecoin TerraUSD, regulatory experts say the collapse might be the end of algorithmic stablecoins as we know it. 



“It is a sad ending to this innovative algorithmic stablecoin experiment,&#8221; Adil Abdulali, head of portfolio management at Securitize, said. &#8220;Algorithmic incentives for stablecoin pegs remain an unsolved problem.”&nbsp;



UST collapsed dramatically this week, de-pegging its goal base-price of $1 and reaching a low of $0.298 earlier today, according to CoinGecko. The token’s adjacent cryptocurrency, LUNA, plummeted from $86 last week to around $1.27 at time of publication.



The situation is real-time proof that lawmakers’ concerns about the stablecoin industry are justified, according to <a href="https://cms.blockworks.co/secretary-yellen-stablecoins-pose-significant-risk-to-financial-stability/" target="_blank" rel="noreferrer noopener">US Treasury Secretary Janet Yellen</a>.



“It&#8217;s quite common that we wake up to regulation only when we have a crisis,” said Jonathan Dharmapalan, CEO of eCurrency, which provides technology for central banks to issue and distribute central bank digital currencies, or CBDCs. “A ‘call to action’ is probably what I would call this situation.” 



For months, regulators have promised that rules to protect investors are coming, but lawmakers across government agencies <a href="https://cms.blockworks.co/us-senator-proposes-looser-stablecoin-regulation/" target="_blank" rel="noreferrer noopener">cannot seem to agree</a> on a path forward. 



“Stablecoins are a form of private money,” Dharmapalan said. “The trouble with that is that stablecoin issuers make up their own rules, and nobody knows whether the rules are appropriate.”&nbsp;



Other stablecoin issuers should expect greater regulatory scrutiny, Abdulali agreed, but it is also important to consider the type of stablecoin. Reserve-backed tokens such as Circle and Tether have, at least <a href="https://cms.blockworks.co/coinbase-circle-to-move-usdc-reserves-out-of-high-risk-investments/" target="_blank" rel="noreferrer noopener">according to the teams behind the coins</a>, robust reserves of safe-haven assets, such as cash and cash equivalents. Algorithmic tokens, such as UST, rely on smart contacts that put incentives in place to maintain the price. 



“Algorithmic stablecoins still need work,” Abdulali said. “None have worked.”&nbsp;



A recent research <a href="http://www.wakeforestlawreview.com/2021/10/built-to-fail-the-inherent-fragility-of-algorithmic-stablecoins/" target="_blank" rel="noreferrer noopener">report</a> from Wake Forest Law Review went further, claiming algorithmic stablecoins are inherently designed to fail. These tokens require a support level of demand for operational stability and rely on independent actors with market incentives to perform price-stabilizing arbitrage, the report said.



“None of these factors are certain, and all of them have proven to be historically tenuous in the context of financial crises or periods of extreme volatility,” the report noted.&nbsp;



Other issuers should consider UST’s collapse as a warning, Dharmapalan said.&nbsp;



“One would assume, in good faith, that all stablecoin issuers have actually thought through what the risks are, and that managing those risks is an active part of what they are doing every day,” Dharmapalan said. “However, I&#8217;m going to guess that that is not really the case.”



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adil abdulali

Terra Collapse Could Spell End for Algorithmic Stablecoins

Macauley Peterson

<div id="highlights-block_627aaac6c2724" class="highlights">
 <ul>
 <li>LFG has deployed its BTC reserves, but $1 billion in circulating supply contraction has so far failed to restore the dollar peg as UST trades around 90 cents</li>
 <li>Critics have long worried about the viability of an undercollateralized stablecoin</li>
 </ul>
 
</div>



Retail users who have relied upon Terra’s Anchor Protocol as a safe, high-yield savings account are waking up to an unpleasant new reality.&nbsp;



Terra USD (UST) has been trading well below its dollar peg since Saturday, but <a href="https://cms.blockworks.co/luna-foundation-guard-to-support-struggling-ust-peg-with-btc-reserves/" target="_blank" rel="noreferrer noopener">the initial drop</a> to 98 cents proved to be a prelude to a much greater fall. It has even attracted the attention of US Treasury Secretary Janet Yellen, who cited UST by name <a href="https://cms.blockworks.co/secretary-yellen-stablecoins-pose-significant-risk-to-financial-stability/" target="_blank" rel="noreferrer noopener">in Congressional testimony</a> today.



As Do Kwon’s Terraform Labs and the Luna Foundation Guard work to restore regularly scheduled programming, the questions on everyone’s mind: Can the project be saved? And how?



The formerly-stable coin slid to just under 70 cents at one point in the past 24 hours, <a href="https://www.coingecko.com/en/coins/terra-usd" target="_blank" rel="noreferrer noopener">according to CoinGecko</a>. This prolonged de-peg has led to mass withdrawals from the preeminent Terra blockchain dApp Anchor, which has seen its deposits plunge by some $7.8 billion.



The net UST supply contraction amounts to roughly $1 billion already. As each UST is redeemed for $1 worth of LUNA, the latter’s supply expands. Since the trouble began May 7, around 25 million LUNA <a href="https://terra.smartstake.io/history" target="_blank" rel="noreferrer noopener">have been minted</a> by the protocol.&nbsp;



The increased supply has decimated the price of Terra’s native asset, which has fallen by 64% over the past week, according to <a href="https://cms.blockworks.co/prices/" target="_blank" rel="noreferrer noopener">data compiled by Blockworks</a>.



On Tuesday, Terra mastermind Do Kwon again sought to quell concern via Twitter, postulating an imminent — though unspecified — recovery plan.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Close to announcing a recovery plan for <a href="https://twitter.com/search?q=%24UST&amp;src=ctag&amp;ref_src=twsrc%5Etfw">$UST</a>. Hang tight.&mdash; Do Kwon 🌕 (@stablekwon) <a href="https://twitter.com/stablekwon/status/1524049689510694916?ref_src=twsrc%5Etfw">May 10, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



<h3 class="wp-block-heading">Monday madness</h3>



After dipping to 92 cents at 2:30 pm ET on Monday, UST appeared to stabilize over the next few hours, but conditions deteriorated rapidly beginning at around 6:15 pm, as UST began a relentless two-hour slide to a nadir of about 65 cents.



Unlike the weekend price action, which was centered on UST trading via centralized exchanges and the Ethereum dex Curve, the extreme volatility this time knocked UST off peg on the Terra chain itself. The speed of the descent overwhelmed the intended arbitrage-based stabilization mechanism built into the protocol design, which has a roughly <a href="https://station.terra.money/proposal/1164">$293 million per day soft cap</a> for redemptions at $1.&nbsp;



Exceed the cap, and the spread — the amount of LUNA that one UST can be redeemed for — is designed to widen. The concept is supposed to prevent manipulation of the mechanism, but it also makes it a slow slog to recover from such a strong shock.



A proposal is currently up for a vote by LUNA holders to effectively increase the cap to $1.2 billion, to allow LUNA to absorb the supply of UST and eventually restore the peg.



Algorithmic stablecoins remain <a href="http://www.wakeforestlawreview.com/2021/10/built-to-fail-the-inherent-fragility-of-algorithmic-stablecoins/" target="_blank" rel="noreferrer noopener">highly experimental</a> and have <a href="https://cms.blockworks.co/algorithmic-stablecoin-developer-sam-kazemian-calls-for-caution-on-regulation/" target="_blank" rel="noreferrer noopener">failed spectacularly</a> before. Most recently, the Waves-based stablecoin USDN <a href="https://cms.blockworks.co/algorithmic-stablecoin-usdn-is-on-the-brink-of-failure/" target="_blank" rel="noreferrer noopener">collapsed to 77 cents</a> in early April and has never fully recovered. It used a roughly similar burn and mint stabilization mechanism to UST’s, and the platform’s WAVES token has <a href="https://www.coingecko.com/en/coins/waves" target="_blank" rel="noreferrer noopener">fallen by 80%</a> since.



UST itself suffered <a href="https://twitter.com/terra_money/status/1397397011603808256" target="_blank" rel="noreferrer noopener">a similar volatility-induced crash</a> in May 2021, when it briefly hit 96 cents. But on a 1-year chart, that now appears as a minor bump in the road.



<figure class="wp-block-image"><img decoding="async" src="https://lh4.googleusercontent.com/MDm7J_NnpgOmDGPrmPFAFVKPDrhG6p0XOBzu6a3xqNy2_VkDSMjYCbjiDzHyYeUgpR_jk0J_ZTnZEAUd2lW2uk9iC6h8BqwXyp95jMVo0rz6YrB4bfSyVg-K0MXyjt4_jwzGjBJkKMEVQj-ZDQ" alt=""/><figcaption>UST over the past year; Source: CoinGecko</figcaption></figure>



Many members of the Luna community, who call themselves “lunatics,” have <a href="https://twitter.com/SmartStake/status/1523844614314147843" target="_blank" rel="noreferrer noopener">expressed support</a> for the protocol and its backers, even in difficult times. But for some, irrespective of whether the peg ultimately recovers, it has been a catastrophic loss.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Heard about a friend of a friend who took his life after losing family savings on Anchor last night. This market is now extremely predatory and it&#39;s a good time to reassess whether you want to play the game or not. Good time to check on friends too 🧡&mdash; Awawat (@Awawat_Trades) <a href="https://twitter.com/Awawat_Trades/status/1523892406130671616?ref_src=twsrc%5Etfw">May 10, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Hey <a href="https://twitter.com/search?q=%24LUNA&amp;src=ctag&amp;ref_src=twsrc%5Etfw">$LUNA</a> <a href="https://twitter.com/search?q=%24UST&amp;src=ctag&amp;ref_src=twsrc%5Etfw">$UST</a> holders &#8211; if anyone is struggling mentally and u need someone to chat with, I’m gonna be around my DMs for the next 2-3 hours to talk to anyone who needs an ear. Seriously.. money isn’t all we make it out to be. U matter and I wanna chat if u need it&mdash; DePhi Alpha 🌔 (@whooome4) <a href="https://twitter.com/whooome4/status/1523897367535230980?ref_src=twsrc%5Etfw">May 10, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



The instability comes as no shock to crypto veterans, according to Mark Richardson, head of research at Bancor, a decentralized exchange and liquidity protocol.



“If you ask anyone from around the industry whether or not this is a surprise at all, everyone will tell you that they’re surprised this didn’t happen sooner,” Richardson told Blockworks.



This story was updated on May 11, 2022 at 6:20 am ET.



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