Luna Foundation Guard Spent $3B In Unsuccessful Bid To Defend UST Peg

LunaFoundationGuardDefendDepeg

On May 7, the Luna Foundation Guard (LFG), the reserve fund for the Terra ecosystem, controlled over $3.1B in assets. Today, it holds just $87M. 

Over the last week and a half, the Terra ecosystem collapsed after the TerraUSD (UST) stablecoin lost parity with the U.S. dollar.  The LFG reportedly spent $3B to defend the UST peg but UST still collapsed and now sits at $0.11.  

According to a Twitter thread posted by LFG, it looks like it allowed select counterparties to swap out their UST for USDT, USDC, and Bitcoin from LFG’s treasury.  In one swap on May 8, LFG sold 26,281,671 USDT and 23,555,590 USDC for an aggregate 50,200,071 UST. 

In another swap on May 8, LFG transferred 52,189 BTC to trade with a counterparty – minus an excess of 5,313 BTC that they have returned – for an aggregate of 1,515,689,462 UST.

‘Exit Parachute’

These swaps have raised questions from the crypto community.  Patrick McKenzie from Stripe called it “shocking” that “the market stabilization fund let insiders cash out to Bitcoin near par.”  DCinvestor, an Ethereum influencer with 200,000 followers, speculated that LFG was created to acquire Bitcoin and give the team an “exit parachute”, not to save the peg.

On May 10, when UST fell to $0.75, ​​TFL – on behalf of LFG – sold 33,206 BTC for an aggregate of 1,164,018,521 UST. The price of Bitcoin on May 10 bounced around $31,000, indicating that UST was purchased at an average price of $0.88. This would explain UST’s rebound to around 90 cents before it truly collapsed.

UST Price On Coinbase

Finally, on May 12, LFG swapped 883,525,674 UST to 221,021,746 LUNA and staked this LUNA across a variety of validators in order to stave off a potential governance attack.

For now, it is all speculation as to which counterparties swapped out their UST. Terra was backed by big name investors like Galaxy Digital Holdings Ltd., Pantera Capital, Lightspeed Venture Partners, Jump Crypto and Three Arrows Capital.

Reimbursements

LFG will compensate remaining UST holders, with the smallest holders coming first. It is debating how to reimburse users.  Ethereum founder Vitalik Buterin earlier tweeted his support for “coordinated sympathy and relief for the average UST small holder who got told something dumb about ‘20% interest rates on the US dollar’ by an influencer.”

Update @ 5/16 8pm ET

On May 16, Terra founder Do Kwon proposed a plan to fork the Terra blockchain into a new chain without an algorithmic stablecoin called “Terra” where the token would be Luna or LUNA; the old chain would then be called “Terra Classic” where the token will be Luna Classic or LUNC. These two chains would coexist.

From there, new LUNA will be airdropped to LUNC stakers, holders, residual UST holders, and essential app developers. “TFL’s wallet will be removed from the airdrop, making Terra a fully community-owned chain,” Kwon added.  If the proposal passes on May 18, then it will coordinate the fork with validators on May 27.

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