The algorithm behind defunct stablecoin TerraUSD was always supposed to keep the token pegged to the U.S. dollar. It turns out it had a little help.
A complaint by the Securities and Exchange Commission filed Thursday claimed that on at least one occasion in May 2021, TerraUSD (UST) was propped up not by its algorithm but by the intervention of a “third party,” which agreed to purchase massive amounts of UST to restore the $1 peg.
The third party, two sources told The Block, was Jump Trading. The SEC has not brought charges against Jump or accused it of any violations.
Jump Trading declined to comment when reached by Fortune.
Do Kwon, the CEO of UST creator Terraform Labs, later misrepresented what actually happened, boasting that the supposedly self-healing algorithm behind UST had restored the peg, the SEC complaint alleges.
“By late May, Terraform was publicly boasting to the investing public that it had purportedly proven the reliability of the UST $1.00 peg—the ‘lynchpin for the entire [Terraform] ecosystem’—in a ‘black swan’ event that was ‘as intense of a stress test in live conditions as can ever be expected,’” the complaint reads.
In exchange for Jump's massive purchase of more than 62 million UST to prop up the stablecoin, Terrraform Labs said it would return Jump’s money in the form of Luna tokens. Even when the cryptocurrency was going for more than $90 on the open market, Terraform Labs would give it to Jump at the price of 40 cents—leading the company to profit some $1.28 billion, according to the SEC.
The inadequacy of the algorithm behind UST became apparent about a year later, when without Jump to intervene UST de-pegged, leading to a crypto bank run that destroyed both UST and its sister cryptocurrency Luna.
Because TerraUSD and Luna were once both among the most popular cryptocurrencies in the world, their collapse caused billions of dollars in losses for investors.
It turned out that several of the promises attracting investors to TerraUSD and Luna likely were lies. Before its collapse, Kwon and Terraform Labs also claimed that Chai, a popular Korean electronic mobile payment application, was using the Terra blockchain to facilitate transactions.
While this would have given the Terra blockchain, which was the digital ledger behind UST and Luna, a real-life use case, the SEC claimed that Chai was not using the Terra blockchain and that Kwon and Terraform Labs were replicating Chai transactions on the blockchain to make it appear as though it was being used.
