Last weekend, as Terra’s UST stablecoin showed the first warning signs of instability, slipping from its dollar peg to $0.985, Luna Foundation Guard (LFG), the nonprofit responsible for overseeing the health of Terra’s ecosystem, voted to deploy $1.5 billion in Bitcoin and UST from reserves to repeg UST to the U.S. dollar.
The move was the execution of a code-red strategy LFG had been planning for months: Since January, LFG had stockpiled over $3.5 billion in reserves of Bitcoin, Avalanche, LUNA, and UST, to deploy if UST ever slipped below $1. Per LFG, that loaned capital would be used to buy up huge amounts of UST, creating buy pressure that would push the stablecoin back up to its intended price.
And yet, hours after the loan, on Monday, UST started to plummet and kept plummeting. By Tuesday, as UST’s price hurtled to unheard-of lows, LFG’s reserves were all but emptied. And yet, no salvation came for the stablecoin: By the end of the week, UST had crashed to $0.13, destroying Terra’s native token LUNA in the process and wiping out $40 billion in value.
The catastrophic failure of Terra’s backstop strategy begs the question: What exactly happened to that $3.5 billion? Where did it go?
According to blockchain analytics platform Elliptic, on Monday, hours after LFG’s announcement of the $1.5 billion loan, a Bitcoin address associated with LFG sent roughly $750 million worth of Bitcoin to a new address. That evening, a further $930 million worth of Bitcoin was sent from multiple LFG-associated wallets to the same new address. This total, 52,189 Bitcoin, worth over $1.6 billion, was then moved from the new address to a single account at Gemini.
The transfer left 28,205 Bitcoin, worth about $875 million at the time, in LFG’s reserves. Early Tuesday morning, the whole amount was moved to an account at Binance.
Whether the Bitcoin in those Gemini and Binance accounts was sold off to buy huge amounts of UST is unknown, however. It’s not possible to further trace whether those massive sums of Bitcoin were sold, or moved any number of other wallets still in LFG’s control.
In the wake of the catastrophe triggered by UST and LUNA’s collapse, many have begun to openly question the transparency of Terra and Terra co-founder Do Kwon’s actions in the last week.
— Ash WSB (@ashwsbreal) May 15, 2022
As of writing, UST was trading at $0.18, and is considered to be functionally worthless. Bitcoin, however, has bounced back to a price above $30,000.