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Wednesday, Jun 12, 2024
Mugglehead Magazine
Alternative investment news based in Vancouver, B.C.

Crypto/Blockchain

Failed algorithmic stablecoin creator Terraform Labs files for bankruptcy

Algorithmic stablecoins differ from other stablecoins like USDC and USDT in that they derive value through a set of rules

Failed algorithmic stablecoin creator Terraform Labs files for bankruptcy
Image from sdx15 via stock.adobe.com

Terraform Labs, the cryptocurrency company behind the failed algorithmic stablecoin TerraUSD, filed for bankruptcy in the United States.

Chris Amani, Terraform Labs CEO, announced the bankruptcy on Monday, indicating that the company intends on meeting all financial obligations to employees and vendors during the Chapter 11 proceedings. The company would also not require additional financing to do so.

Terraform Labs’ Luna token gained prominence in December 2021 when it started its ascent from USD$5 to a peak of USD$116 in April 2022. However, on May 9, 2022, it experienced a sudden collapse, shedding 99 per cent of its value in just 48 hours.

Algorithmic stablecoins differ from other stablecoins like USDC and USDT in that they derive value through a set of rules rather than being tied to an asset like the United States dollar or gold.

Luna was an algorithmic stablecoin that maintained a stable value by using a smart contract mechanism.

When Luna’s price deviated from its target value, the system adjusted the supply of Luna tokens.

If Luna’s price fell below the target, a smart contract would trigger the creation of Luna tokens to balance the supply. However, if Luna’s price ever exceeded the target, it would initiate the burning of tokens or offer incentives to decrease the supply. Unfortunately, this system, designed to maintain Luna’s value stability, ultimately failed.

It failed because its developers didn’t take sudden market fluctuations like a sudden drop into consideration, which overloaded one side and caused the smart contract to fail. Ultimately, Luna’s price controls failed, and the Terra/Luna experiment became another footnote in the history of failed cryptocurrency ventures.

Read more: TerraZero Technologies and Napster offer artists collaborative space in the metaverse

Read more: CoinShares’ Valkyrie Funds acquisition boosts assets under management by $110 million

Terra and Luna crash contributed to crypto winter

The value of TerraUSD plummeted to around $0.02, triggering a nosedive in the Luna coin. This crash sent shockwaves throughout the crypto market, causing investors to withdraw billions of dollars from other cryptocurrencies out of fear of a similar crash.

Other cryptocurrencies like Bitcoin lost an estimated $400 billion in value.

Authorities detained co-founder Do Kwon in Montenegro. Kwon awaits extradition after being found guilty of forging documents. Regulators in the United States have charged him with defrauding investors, and he also faces fraud charges in his native country, South Korea, making extradition there a possibility.

Chapter 11 bankruptcy allows Terraform Labs to continue its business operations, which primarily involve offering blockchain and other Web3-related services. Bankruptcy documents, filed in Baltimore, list the company’s assets as ranging from $100 million to $500 million.

They also indicate that Do Kwon, who owns 92 per cent of the company’s shares, and co-founder Daniel Hyunsung Shin, who owns the remaining 8 per cent, are the major shareholders.

In March 2023, Kwon’s arrest in Montenegro occurred as he attempted to board a plane bound for Dubai.  He was convicted and sentenced to jail for forging documents three months later, a charge he denied.

Han Chang-joon, Terraform Labs’ former finance officer, faced a similar fate, receiving a prison sentence for the same charges.

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