All about the failure of ‘stablecoin’ Terra and its founder Do Kwon, who faces arrest in South Korea

Stablecoins, pegged to fiat currencies such as US dollar or gold, were touted as an alternative to protect investors from volatile crypto markets.

FPJ Web DeskUpdated: Sunday, September 18, 2022, 03:35 PM IST
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With transactions secured via encryption on blockchains, decentralised cryptocurrencies are considered as secure investment vehicles, as they can’t be counterfeited. But at the same time the crypto ecosystem has its own set of mysterious figures, starting with Bitcoin creator or creators, only known by the pseudonym Satoshi. Over the years, the likes of Gerry Cotten who died leaving $190 dollars in cryptocurrencies locked in an e-wallet, and Ruja Ignatova who vanished after pulling off a $4 billion crypto scam, have haunted investors.

In the eye of the storm

Although critics raise concerns about fluctuations in value of cryptocurrencies, the founder of a ‘stablecoin’ is currently in the news after wiping out $40 billion of investors’ savings. Terraform Labs CEO Do Kwon has tweeted that he is not on the run, without revealing his location, after an arrest warrant was issued against him in South Korea. He is the founder behind cryptocurrency TerraUSD and its sister token Luna, which crashed earlier this year, hitting the value of Bitcoin and Ethereum as well.

The stability myth

Stablecoins, as the name suggests, are supposed to provide stability in comparison to other crypto assets since they are pegged to fiat currencies such as USD and pounds, or gold. Although they are supposed to protect investors from volatile crypto markets, recent drops in value for high profile stablecoins such as USDN, USDT and USDD, clearly show that they are failing. But the most spectacular collapse for a stablecoin came in May this year, with the Terra and Luna crash that has left the crypto market subdued.

Launched in 2018 as an algorithmic stablecoin, TerraUSD was backed by codes and Luna tokens interwoven instead of cash or other physical assets. To sum it up, the stable cryptocurrency was created using unstable components, and Luna was used as a governance token so that it didn’t look made up. It was pegged to the US dollar and the price of Luna tokens had reached an all time high above $119 dollars by April 2022. But by May 2022, TerraUSD fell to 10 cents and Luna almost hit zero, after which the Terra blockchain had to be halted for the first time.

Fear and loathing in cryptotown

The collapse which forced Binance to stop TerraUSD and Luna withdrawals, was probably caused by large scale selling of Luna. Panic sparked by the collapse also hit Bitcoin among other cryptocurrencies, dragging down its value by 60 per cent. The resultant instability caused a loss of $200 billion to investors in the crypto ecosystem.

As part of an investigation into alleged fraud behind the Terra collapse, South Korean authorities have raided 15 companies. Arrest warrants have been issued against Do Kwon and others, who are currently residing in Singapore. Although fraud charges haven’t been filed so far, Kwon may soon be extradited.

The incident highlights that while cryptocurrencies promise and also deliver lucrative returns, thorough research is required before investing in the volatile market.

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