TerraUSD backers seek $1.5bn to prop up stablecoin

Cashaa among prospective investors that received the proposal from the Luna Foundation Guard.
The backers of the TerraUSD algorithmic stablecoin are trying to raise about $1.5 billion to shore up the token after it crashed from its dollar peg, according to the founder of a firm that was approached about the deal.Investors in the proposed deal will be able to buy the Luna coin at a 50% discount to the spot price, Kumar Gaurav, the founder and chief executive of crypto liquidity provider Cashaa, said in an interview. Luna, the token that’s part of the peg mechanism for TerraUSD, has tumbled about 95% in the past 24 hours.

The plunge in TerraUSD, or UST, has reignited the debate over algorithmic stablecoins, a subject of controversy within the crypto industry. It crashed to around 45 cents on Wednesday, days after breaking an intended 1-to-1 peg to the dollar, as confidence in the project evaporated.

Cashaa is among prospective investors that received the proposal from the Luna Foundation Guard, Gaurav said, adding that his firm won’t participate. Investors will be subject to a one-year lockup and a monthly “linear vest” over 12 months, he added. The LFG didn’t immediately respond to requests for comment.

“UST’s collapse is the biggest threat to crypto right now,” said Gaurav. “It has massive ramifications across the entire industry. If UST stays below peg for enough time, it could cause even more Luna to be minted and sold to the market, increasing the risk of UST’s solvency.”

The Block reported on the fundraising plans earlier.

Broader crypto markets showed few signs of getting caught up in the turmoil on Wednesday, with stablecoins like Tether holding their pegs and major tokens including Bitcoin and Ether trading higher.

Read: TerraUSD stablecoin plunges

Do Kwon, the main backer behind TerraUSD, said in a Twitter thread on Wednesday that he had endorsed a proposal to increase minting capacity of UST and Luna on the Terra blockchain from $293 million to $1.2 billion, arguing that this would “allow the system to absorb the UST more quickly.”

“Before anything else, the only path forward will be to absorb the stablecoin supply that wants to exit before $UST can start to repeg. There is no way around it,” he said, noting that this effort would come at “a high cost” to all holders of TerraUSD and Luna.

Kwon said options are being explored to bring in outside capital, without providing details.

Anchor lending project
Unlike conventional stablecoins like Tether’s USDT or Circle’s USDC that are backed by real-world highly liquid cash equivalents or dollars, algorithmic tokens are designed to maintain their peg (and investor confidence) through a combination of mathematical equations and active trading.

In the case of UST, investors can exchange one unit of the token, no matter what price it’s currently trading at, for $1 worth of Luna. The embedded arbitrage trade helps keep UST at or close to $1, or so the theory goes.

Members of Anchor, a lending project built on the Terra blockchain, on Wednesday proposed temporarily cutting its interest rate to a minimum of 3.5%. Anchor has been the main driver of UST demand on Terra. It previously offered an interest rate of nearly 20% to those who deposit UST on its protocol.

Falling yields on Anchor may lead to “significant” outflows from UST, which in turn impacts the supply of Luna and its price, said Kunal Goel, an analyst at Messari. That creates a vicious circle by increasing pressure on UST as less funds back the stablecoin, he said.

“There is not enough demand for Luna because Luna holders know they will get diluted to pay off UST holders’ debt,” Goel said. “UST holders want to exit because they understand that their debt is not supported without the demand for Luna and sufficient reserves. That’s the death spiral we’re in.”

© 2022 Bloomberg L.P.

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