Revealed: Terra’s UST Peg Was Maintained Artificially, Not By Algorithm?

Terra’s indigenous stablecoin, the TerraUSD (UST), was once touted to be an engineering marvel in the blockchain sector. With its unique, dual token system–it behaved like any other stablecoin which tracked the price of the U.S. dollar–but without any actual cash held in a reserve to back it. However, recent revelations tell a different story altogether.

Jump Trading Propping UST Peg?

According to a Securities and Exchange Commission (SEC) complaint submitted on Thursday, TerraUSD (UST) was backed at least once in May 2021 not by its algorithm but rather by the intervention of a “third party,” which committed to buying sizable amounts of UST to restore the $1 peg.

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The most recent information points to Jump Trading as being the third party. However, at the time of writing, the SEC has not filed any charges against Jump nor has it accused it of violating any regulations. TerraUSD, commonly referred to by its ticker UST, experienced a catastrophic failure in May 2022, causing investors to lose tens of billions of dollars. Nevertheless, these claims from the SEC pertain to a de-pegging that took happened one year earlier. The assertion that Terraform Labs used human traders to prop up its value rather than the software algorithm which claimed to back the system was at the center of these allegations.

In its official complaint, the SEC was quoted as saying:

In May 2021, when the value of UST became ‘unpegged’ from the U.S. dollar, Terraform, through Kwon, secretly discussed plans with a third party, the ‘U.S. trading firm,’ to buy large amounts of UST to restore its value.

It further alleged that when UST’s price moved back up as a result of these attempts, the defendants erroneously and misleadingly represented to the public that UST’s algorithm had effectively re-pegged UST to the dollar.

Luna As Compensation

Terrraform Labs, however, allegedly promised to repay in the form of LUNA tokens in exchange for Jump’s massive purchase of more than 62 million UST to prop up the stablecoin. Even when the cryptocurrency was trading for more than $90 on the crypto market, Terraform Labs would sell it to Jump for only $0.40, which resulted in a profit of almost $1.28 billion for the corporation. But, the terms of the agreement were enhanced even more by Terraform in order to assist in maintaining TerraUSD, according to the SEC. The trading company would now routinely collect tokens at a mere LUNC price (earlier LUNA) of forty cents.

The inefficiency of the algorithm that underpinned UST became apparent approximately one year later when, in the absence of intervention by Jump, the stablecoin de-pegged and went on a death spiral, destroying both UST and its sister altcoin LUNA in the process.

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