CZ, SBF and Vitalik Buterin Share Their Views on The Downfall of Terra

The Luna Foundation Guard, the organization backing Terra, has come out to explain the market crash and how it reacted. The LFG detailed that it tapped on its reserves as it attempted to stop the bleeding.

Terra exhausted its $3 billion reserve, trying to restore UST's dollar peg

After days of speculation, the Luna Foundation Guard has provided an update on the fate of its $3 billion UST crypto backing. The LFG explained in a Twitter thread posted today that it used a large proportion of the reserves as it struggled to support the freefalling UST.

From an initial 80,294 Bitcoin holding, the LFG reserves have fallen to 313 BTC. LFG says that when UST de-pegged and started drowning on May 8, it began exchanging the reserves for UST by direct on-chain swaps that allowed a third party to get into trades with the LFG on short notice. The non-profit sold 26,281,671 USDT and 23,555,590 USDC for a total of 50,200,071 UST. There was a further exchange of 52,189 BTC (with a net excess of 5,313 tokens returned) for 1,515,689,462 UST.

As the situation worsened, using a January 10 2022 Master Service Agreement that allows Terraform Labs to manage “finance, administrative, & operational functions, & support as requested,” the Terra backer swapped 33,206 BTC for UST. On May 12, it swapped 883,525,674 UST for 221,021,746 LUNA to shield off a governance attack.

Currently, LFG still holds 39,914 BNB, 1,973,554 AVAX, 1.85 billion UST, and 222 million LUNA (most of which is staked) in addition to the 313 BTC. The Foundation says its plans to disburse the remaining holdings to affected users, starting with the smallest first, but it's yet to establish a distribution method.

FTX chief repudiates claims labeling Terra creator the Elizabeth Holmes of crypto

Following the Terra ecosystem's recent implosion, CoinDesk wrote up a piece comparing Terraform Labs CEO Do Kwon to the infamous American entrepreneur convicted of criminal fraud, Elizabeth Holmes. The Theranos founder sold investors a fake promise of a medical diagnostic invention.

FTX CEO Sam Bankman-Fried has, however, defended the troubled Terra executive. Bankman-Fried noted in a recent Twitter thread that “not all bad things are the same bad thing.” The FTX chief explained that even with the collapse of LUNA/UST, Do Kwon didn't lie as the Holmes did, hence the comparisons are unfitting.

The structure was always doomed

Bankman-Fried added that while the whole idea of a UST stable coin backed by decentralized money was transparent, it was, in fact, misrepresented.

He noted that the Terra founder stood by his creation even though he knew its failure was imminent – Do Kwon didn't establish inaccurate claims of a UST stable coin backed 1:1 with the US dollar.

Sam Bankman-Fried explained that the backing by volatile assets (crypto assets) was an apparent sign of failure to the entire public. In his view, the downfall was going to come sooner or later as its failure was evident to all.

He noted that LUNA was built by “mass enthusiasm, excitement, and marketing and memes,” which is why users onboarded. Comparing it to others, including Cathie Wood's ARKK Investment, AMC, and Netflix, all of which have lost more than 50% in value this year, he concluded that LUNA was simply a bad investment.

CZ squashes Binance UST investment rumors

The CEO of Binance, the first major exchange to delist LUNA and UST pairs following the disruption of the Terra network, Changpeng Zhao, yesterday took to Twitter to clear rumors that had been floating over Binance's role as an investor in UST.

Responding to the tittle-tattle, the Binance CEO noted that the past few weeks have been a “watershed moment” for cryptocurrencies referencing Terra's breakdown and the resilience seen in the current bear market.

Zhao first denied rumors that Binance's action on UST trading was tied to its investment in the stable coin. He said that Binance only ever put $3 million into Terra – a layer 0 blockchain – in 2018, before the creation of UST. He clarified that Binance hadn't acquired any UST and didn't take part in Terraform Labs' second-round raise.

Zhao had mentioned in a different tweet that any little UST the exchange held was from trading fees. He has since revealed that the exchange holds a further $12 million in UST (from staking, not purchases) and 15,000,000 LUNA it received as part of its 2018 investment.

Even with that, Zhao said that such is the nature of investments, as they do not assure success noting that Binance Labs, which the CEO said has invested in “hundreds of projects over the last four years,” has had its share of both successes and failure. Still, he advocated for transparency and immediate action whenever there's a failure such as Terra's. He also reiterated Binance's commitment to supporting a Terra comeback.

CZ on the offensive

Zhao, who labeled UST an over-leveraged stable coin, said that the downfall of the Terra network was pushed by the idea that minting saves a falling token. In reality, he explained, it only takes away value from the existing holders, as in the case of LUNA.

The Binance executive's insistence is on token burns to regulate the circulating supply rather than the proposal to migrate to LUNA2 and UST2 via a hardfork to an older date before the markets capitulated. He also questioned where the Bitcoin backing supposed to support the UST peg went, but he seems to have gotten an unofficial response.

Ethereum's Vitalik Buterin insists on a ‘small users first' approach in protecting investors amidst the UST collapse

Ethereum co-founder Vitalik Buterin is another one to weigh in on the ongoing troubles of the Terra ecosystem. The Canadian-Russian developer backed a suggestion to reimburse smallholders first, then whales later. Buterin wrote in a quoted response to a Twitter thread by a user suggesting a focus on the smaller wallets.

A distribution approach of some sorts

The idea was that while Terra is currently looking to make investors whole again, it should prioritize settling the poorest 99.6% of wallets, as a considerable proportion of the community would be fully sorted. Buterin voiced his strong support for this submission that would mean “coordinated sympathy and relief for the average UST smallholder” who was hoodwinked by fake promises of a massive yield of up to 20% of their stable coin holdings.

According to Buterin, the wealthy investor can then be sorted later.

He also observed that in Singapore, where Terraform Labs is headquartered, the law favors the small-timer with a stiff regulatory stance, but not so much for wealthier figures. Buterin posted a screenshot of Part IV of the Employment Act.

The Ethereum creator also questioned the idea of an ‘algostable,' terming it a misleading term that's grouping uncollateralized stablecoins in the same pool as collateralized stables.

Collateralized stables such as DAI are backed by assets in reserve with reference to a particular standard such as fiat in the USD or AUD.