TerraUSD was promoted as a world-class cryptocurrency. Now its investors are recovering from painful losses and wondering if it was all a plan to get rich quick.
A Massachusetts surgeon can’t help but think about how he lost his family’s egg. A young Ukrainian man considered suicide after losing 90% of his savings. Other investors have abandoned their dreams of starting a new business or quitting their jobs.
All of them were devastated by the TerraUSD craze, whose total value rose to $ 18 billion before collapsing earlier this month. The sudden fall of the currency reminds us that the crypto, which enjoyed a large bullish market last year, is often little more than a casino, with weak regulation and few means of recourse for losers.
The crash caught many investors off guard because TerraUSD was a stable currency, designed to maintain its value of $ 1 per coin. Unlike bitcoin, which has repeatedly crashed in its short history, TerraUSD presented itself as a port of volatility. It fell below $ 1 earlier this month and was trading at around 8 cents on Thursday.
Investors rallied to TerraUSD because of the opportunity to make money with Anchor Protocol, a kind of cryptobank that offered annual returns of almost 20% of currency deposits. Critics questioned whether Anchor’s performance was sustainable. But these surprising interest rates are common in decentralized finance or DeFi, a kind of parallel financial system for cryptocurrencies with their own version of banks and loans.
As is often the case in unregulated and untested markets, the tone was too good to be true. Now, the implosion of TerraUSD has fueled calls for greater government oversight of stable currencies.
WSJ’s Dion Rabouin explains why Wall Street is so committed to cryptography and what it means for the new asset class and its future. Photographic composition: Elizabeth Smelov
Some investors who lost money in the crash say they didn’t understand exactly what they were getting themselves into. One of the key risks that many could not appreciate was the design of the stable currency. TerraUSD was prone to collapse because it was a stable “algorithmic” currency not backed by real assets. Other stable currencies, such as USD Coin, say they have $ 1 in cash, Treasury bills or other traditional financial assets for each unit of digital currency, which allows them to keep their bond in the dollar.
A spokesman for Terraform Labs Pte. Ltd., the Singapore-based company behind TerraUSD and Anchor Protocol, said it was clear about the risks of both initiatives. “As with virtually the rest of life, each individual has to decide for himself what risks he is willing to take,” the spokesman said.
“We have worked hard to put in place measures that we believe will help maintain and protect Earth’s future, a future we believed in from the beginning,” he added.
Keith Baldwin, a 44-year-old surgeon living outside of New Bedford, Massachusetts, has saved $ 177,000 over the past decade. Last year he took his savings and bought USD Coin, putting it in a cryptocurrency account that paid a 9% annual return.
In April, it moved it to a pseudo-savings account powered by TerraUSD that offered 15%. More than 90% of its savings disappeared in a few days when TerraUSD lost its link to the dollar. Dr. Baldwin said he did not know that Stablegains, the startup that managed the account, was turning its USD Coin stakes into TerraUSD. (USD Coin has maintained its $ 1 fix.)
Keith Baldwin says he’s cutting back on spending so he can still save for his children’s education.
Photo: Vanessa Leroy for The Wall Street Journal
Dr. Baldwin is not considered a cryptography enthusiast. He was hoping to spend the money on a house. She has now been reducing her expenses so that she can still save for her children’s education. “I don’t want to punish our kids for the mistake I made,” he said.
TerraUSD fell below $ 1 on May 7th. Over the next week, it continued to fall and bounce back, as the team behind the stable currency, led by South Korean cryptocurrency developer and founder of Terraform Labs, Do Kwon, burned a $ 3 billion reserve fund. dollars in an unsuccessful bid. to defend the value of TerraUSD.
When Dr. Baldwin learned that TerraUSD’s problems were threatening his nest, he struggled to withdraw his Stablegains funds. Hours passed as the site processed the transfer. When they landed on Dr.’s newly created account. Baldwin at the Kraken cryptocurrency exchange, the currency was trading at just 14 cents.
Stablegains said it was coming to an end last weekend, and its founders said they were “deeply saddened and devastated.” In an emailed statement, Stablegains said it had disclosed the risks of DeFi online and in its terms of use. The startup said it had about 5,000 customers.
The crisis has had repercussions around the world. In France, Thomas Blanc hoped to use his profits from cryptocurrency investment to organize free electronic music festivals, do charity projects, and help his parents retire early. Instead, he ended up losing nearly $ 400,000.
In Australia, Ben Thompson endured sleepless nights before deciding to sell his TerraUSD if the currency recovered to 65 cents. He woke up the next morning and found that he was trading at around 10 cents.
In Ukraine, a 30-year-old man working in insurance thought that a stable currency would be safer than a bank in his war-torn country. He fell into a depression, he said, after losing most of his savings.
Dr. Baldwin, Mr. Blanc and Mr. Thompson, and the Ukrainian man are part of a group of more than 4,000 people on the Discord chat platform dedicated to claiming their losses.
Thomas Blanc had hoped to use some of his cryptographic benefits to help his parents retire early.
Photo: Dine Rabehi
In a May 13 tweet, Mr. Kwon lamented those who lost money in the collapse of TerraUSD, and wrote, “I am heartbroken by the pain my invention has caused you all.”
In the coming days, investors burned by the crash may receive funds in a new cryptocurrency, partially offsetting their losses. Mr. Kwon and his fellow developers have said they are creating the new cryptocurrency as part of a reboot of the Terra blockchain network.
It is unclear how many investors were affected by the collapse of TerraUSD, but there are likely to be thousands.
As of the crash, some 265,000 cryptocurrency addresses had been deposited by TerraUSD in Anchor Protocol, according to blockchain analytics provider Nansen. This may not correspond to the total number of investors, however, as one person may have multiple addresses. And in some cases, several people grouped their assets and deposited them in Anchor from an address.
Unlike asset-backed stable currencies, TerraUSD was effectively backed by Luna, a volatile cryptocurrency, also created by Mr. Kwon. An integrated mechanism was designed to restore the fixation of the TerraUSD dollar if its price deviated from $ 1.
Here’s how it should work: If TerraUSD falls below $ 1, traders could buy the currency and turn it into $ 1 of Luna, earning arbitrage profits. This would deplete TerraUSD’s offer and return its price to $ 1. But the mechanism only worked if traders saw value in Luna. When TerraUSD began to falter this month, Luna went into free fall.
Some investors said they did not know that TerraUSD had this vulnerability. Brian Anderson, a 45-year-old former Utah professor, took out a $ 95,000 loan against his home in December 2020 and put the money into Anchor Protocol in March, encouraged by an online investment course. He had planned to use interest payments and other earnings to attend a U.S.-accredited medical school in the Caribbean and become a physician.
“I thought it wasn’t risky,” Mr. Anderson, “to be in a stable currency.”
Write to Alexander Osipovich at alexander.osipovich@dowjones.com and Caitlin Ostroff at caitlin.ostroff@wsj.com
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