Terra (blockchain)

Last updated

Terra
Developer(s) Terraform Labs
Initial release24 April 2019[ citation needed ]
Website terra.money

Terra is a blockchain protocol and payment platform used for algorithmic stablecoins. The project was created in 2018 by Terraform Labs, a startup co-founded by Do Kwon and Daniel Shin. It is best known for its Terra algorithmic stablecoin and the associated LUNA reserve asset cryptocurrency.

Contents

In May 2022, the Terra blockchain was temporarily halted after the collapse of the algorithmic stablecoin TerraUSD (UST) and the cryptocurrency LUNA, an event that wiped out almost $45 billion in market capitalization within a week. [1] [2] On January 21, 2024, the company filed for bankruptcy. [3]

Design

Terra is a blockchain that leverages fiat-pegged stablecoins to power a payment system. For consensus, the Terra blockchain uses a proof-of-stake codesign. [4] Several stablecoins are built atop the Terra protocol, [4] including TerraUSD, which was the third largest stablecoin by market capitalisation before its collapse in May 2022. [5] The Terra blockchain has a fully-functional ecosystem of decentralized applications (or DApps), such as Anchor, Mirror, and Pylon, which utilised the stable-coin infrastructure of Terra. [6]

Terra is a group of algorithmic stablecoins, named according to the currencies to which they were pegged—for example, TerraUSD (UST) was pegged to the U.S. dollar. LUNA served as the primary backing asset for Terra, also used as a governance token for users to vote on Terra community proposals. UST stablecoins were not backed by U.S. dollars; instead, they were designed to maintain their peg through a complex model called "burn and mint equilibrium". This method uses a two-token system in which one token is supposed to remain stable (UST) while the other (LUNA) is meant to absorb volatility. [7]

The Anchor Protocol was a lending and borrowing protocol built on the Terra chain. Investors who deposited UST in the Anchor Protocol were receiving a 19.45% yield paid out from Terra's reserves. [8] Due to such a high yield, some critics raised concerns that Kwon's stablecoin model could function like a "ginormous Ponzi scheme". [9] [10] [11] Mirror Protocol was another Terra chain project, which designed and offered financial derivatives designed to "mirror" traditional listed stocks. [12]

History

In 2018, Do Kwon and Daniel Shin (also known as Shin Hyun-sung [13] ) co-founded Terraform Labs in Seoul, South Korea. In 2019, Terraform Labs launched its first cryptocurrency token. [4] Terraform Labs raised more than $200 million from investment firms such as Arrington Capital, Coinbase Ventures, Galaxy Digital and Lightspeed Venture Partners. [14]

In January 2022, the Luna Foundation Guard (LFG) was established as a non-profit based in Singapore, with Do Kwon as director. Terraform Labs allocated a portion of the profit from UST sales to Luna Foundation Guard, to be used as reserves to stabilize the price of UST. As of 7 May, just before UST broke its peg, LFG held reserves of 80,394  bitcoin worth approximately $2.4 billion. Bitcoin was the largest portion of the reserve, though LFG also held various other stablecoins and cryptocurrencies. [15]

In February 2022, Terra and the Washington Nationals Major League Baseball team announced they had entered into a sponsorship agreement which provided stadium and television branding, as well as the rebranding of the Washington Nationals club and lounge to the "Terra Club". The deal was originally proposed to the Terra community by Kwon, referring only to an unnamed "sports franchise in one of the four major American professional sports leagues", and the community agreed to pay $38.15 million for a five-year exclusive partnership. [16]

The founders Kwon and Shin each owned one share of Terraform Labs, giving each founder 50% of the controlling power. Kwon later enlarged his stock pool to eleven shares, giving him 91.7% ownership and Shin the remaining 8.3%. Shin and Chai Corporation, a Terra-ecosystem payment service company that he founded, announced on 18 May 2022 that Shin no longer held any ownership stock in Terraform Labs. However, the Singaporean Account and Corporate Regulatory Authority revealed that Shin still held 8.3% Terraform Labs ownership, and Chai Corporation announced that Shin was not able to "finish liquidating his remaining ownership in time" despite having the same share of ownership as of 18 May. The documents from the Singaporean authority also revealed that as of 18 May, Shin held 51.2% of ownership and Kwon 22.4% of Chai Holdings, the parent company of Chai Corporation. [17] [18] [19]

Collapse

Beginning on 9 May 2022, the tokens made headlines after UST began to break its peg[ why? ] to the US dollar. Over the next week, the price of UST plunged to 10 cents, [20] while LUNA fell to "virtually zero", down from an all-time high of $119.51. [21] Before the crash, LUNA was one of the top ten largest cryptocurrencies on the market. [22] The collapse wiped out almost $45 billion of market capitalisation in one week. [1] [23] Terra-Luna operated on a two-coin system protocol that lacked traditional collateral backing. Its collapse was likely triggered by an attack[ by whom? ] on its liquidity pool and was facilitated by flaws in the underlying blockchain framework. [24]

On 13 May, Terraform Labs temporarily halted the Terra blockchain in response to the falling prices of UST and LUNA. [21] [25] Despite the company's attempts to stabilize UST and LUNA via its bitcoin and other cryptocurrency reserves from the Luna Foundation Guard, they were unable to reestablish the 1:1 peg of UST to USD. As of 16 May 2022, blockchain analysts claim that the expenditure of the LFO bitcoin reserves still remains unclear. [26] [27]

Likely causes of the collapse included mass withdrawals from the Anchor Protocol days before the collapse, investor concerns about cryptocurrencies more generally, and a drop in the price of bitcoin. [28] [29] [30] During the collapse, holders converted UST into LUNA via the mint-and-burn system, which caused the price of LUNA to collapse due to its increased supply. [31] This in turn destabilized the balancing mechanism between the currencies. [29]

On 25 May, a proposal was approved to reissue a new LUNA cryptocurrency and to decouple from and abandon the devalued UST stablecoin. The original blockchain is now called Terra Classic, and the original LUNA token is called LUNA Classic (LUNC). [32] [33] The new LUNA coin is called "Terra 2.0" by investors, and has lost valuation in the opening days of being listed on exchanges. [34] [35] [36]

In an August 2022 interview on the NFTV series Coinage, months after the collapse, Terra founder Do Kwon remarked that his faith in Terra now "seems super irrational". However, he denied that the Terra system was a ponzi scheme. [37]

On 23 March 2023 Kwon attempted to travel to Dubai using false Costa Rican documents, [38] [39] while also carrying false Belgian travel documents, [38] but he was intercepted and arrested at Podgorica Airport in Montenegro. [38] [39] A federal grand jury in Manhattan subsequently laid eight charges against Kwon, including securities fraud, commodities fraud, wire fraud and conspiracy. [40] The following month, KBS News reported that prior to the collapse of TerraUSD, Kwon had sent 9 billion won (worth USD $7 million) to the law firm Kim & Chang. [41]

On January 21, 2024, Terraform Labs declared Chapter 11 bankruptcy in the United States, listing assets and liabilities in the range of $100-$500 million. [3]

Licensing and regulatory issues

Terraform Labs Pte. Ltd., the company behind Terra, is incorporated in Singapore but did not submit an application for a licence under the Payment Services Act according to The Straits Times . [42] It is also not a notified entity, meaning it has not been granted temporary exemption from holding a licence by the Monetary Authority of Singapore. [42] According to documents filed by Kwon at the Supreme Court of Korea's Registry Office, Kwon filed to dissolve the company's Korean entity on 30 April 2022, and was granted approval on 4 May 2022. [43] [ unreliable source? ] [44] [45] [46] [47] [48]

The U.S. Securities and Exchange Commission (SEC) issued a subpoena to Terraform Labs and Kwon in 2021, with specific regard to Terraform Labs' Mirror Protocol, which designed and offered financial derivatives that virtually "mirrored" actual listed stocks. [12] Kwon refused the subpoena, and instead announced he would sue the SEC. [49] Despite his attempts to dispute and avoid investigations from the SEC, a U.S. Court hearing in Manhattan in February 2022 ruled in favour of the SEC's right to continue its investigation into Kwon and Terraform Labs.[ citation needed ] In February 2023, the SEC charged Terraform Labs and Kwon with fraud. [50]

On 18 May, the newly appointed Korean Minister of Justice, Han Dong-hoon, enlarged the economic crimes investigation division of the Seoul Southern District Prosecutor's Office, vowing to "track illegal funds and capital transfers, crack down on tax evasion, audit company finances, compile transaction data, and seize the proceeds of criminal financial activity." [51] On its first day of operation, the Financial and Securities Crimes Joint Investigation Team singled out the LUNA and Terra crisis as its first investigation target. [52] [53] [54]

A class action, Patterson v. TerraForm Labs Pte Ltd. et al, was filed against Terraform Labs and others in the United States District Court for the Northern District of California on 17 June 2022. [55] In September 2022, a $56.9 million class action was filed at the High Court of Singapore against Do Kwon, Terraform Labs, Nikolaos Alexandros Platias and the Luna Foundation Guard. [56]

In June 2022, Yonhap News reported that 15 people, including former Terraform developers for the Anchor lending protocol, had been imposed with travel restrictions by the Korean government. [57] On November 29, 2022, an arrest warrant was issued for Daniel Shin by South Korean prosecutors. [58]

TerraUSD (UST) Collapse

Binance was an active investor in Terraform Labs, contributing **$3 million** in funding and an additional **$1 million in BNB tokens**. The company promoted TerraUSD (UST) as a "safe and fiat-backed" stablecoin, which attracted many investors to its platform. After UST’s collapse, which resulted in significant financial losses, Binance came under increased scrutiny for its role in promoting this risky product. [59]

In January 2023, Binance invoked an arbitration clause to block a class-action lawsuit filed in the United States by investors affected by the TerraUSD collapse. The lawsuit alleged Binance had sold unregistered securities and failed to disclose the risks associated with UST. The arbitration clause stipulated that all disputes be resolved in Hong Kong, limiting the plaintiffs’ legal options. [60]

U.S. Sanctions and Allegations

SEC Settlement with Jump Trading

In October 2024, the U.S. Securities and Exchange Commission (SEC) announced a $123 million settlement with Jump Trading, a key partner in the Terra ecosystem. The SEC alleged that Jump Trading manipulated the market to maintain TerraUSD's (UST) peg to the U.S. dollar, creating the illusion of stability. The funds recovered from this settlement are intended to compensate victims of the UST collapse through a process to be announced.

This settlement highlights the role of external entities in supporting and enabling the Terra ecosystem during its rise and subsequent collapse. Exchanges such as Binance, which actively promoted UST as "safe and fiat-backed" while holding a significant portion of the UST supply, are also under scrutiny. Legal experts have drawn parallels to the Madoff case, where banks and intermediaries were held accountable for facilitating fraudulent schemes. This comparison suggests that exchanges like Binance may face future regulatory actions or lawsuits for their involvement in the Terra collapse. [61]

In December 2022, **15 French investors** filed a complaint against Binance France and Binance Holdings Ltd., accusing the company of: - Misleading advertising by promoting TerraUSD (UST) as a "safe and fiat-backed" stablecoin, - Operating illegally without registration as a Digital Asset Service Provider (DASP) with the Autorité des Marchés Financiers (AMF) before May 2022, - Failing to conduct adequate due diligence on listed assets, leading to significant investor losses. [62]

Summary

The numerous sanctions, fines, and allegations against Binance demonstrate increasing global regulatory scrutiny, particularly in the United States and France. Binance’s involvement in promoting controversial projects such as TerraUSD (UST), combined with its non-compliance with international financial laws, has led to significant investor losses and strengthened calls for stricter regulation of cryptocurrency platforms.

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References

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  2. ↑ Melinek, Jacquelyn (12 May 2022). "Terra resumes blockchain production after halting to prevent hacks amid UST crash". TechCrunch . Retrieved 17 May 2022.
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  22. ↑ Hart, Robert (6 December 2021). "Terra's Luna Becomes Top Ten Cryptocurrency As Market Selloff Sends Bitcoin Down". Forbes. Archived from the original on 11 February 2022. Retrieved 1 June 2022. Terraform Lab's Luna cryptocurrency is now one of the ten largest cryptocurrencies by market capitalization, according to CoinGecko.
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  44. ↑ Kim, Jeong-suk (13 May 2022). "루나 창업자 권도형은 어디에…11일 투자독려 트윗 후 행방묘연" [Where Is Luna Founder Kwon Do-hyung? After the Tweet Encouraging Investments on the 11th, His Whereabouts Are Unknown]. Maeil Business Newspaper (in Korean). Archived from the original on 16 May 2022. Retrieved 15 May 2022.
  45. ↑ Son, Seok-woo (16 May 2022). "[이슈분석] 'K-코인' 루나·테라 사태에 가상자산 '쇼크'…영향은?" [[Issue Analysis] Aftermaths of the ‘K-Coin’, Luna and Terra Crisis and the Cryptocurrency’Shock’]. Seoul Broadcasting System (in Korean). Archived from the original on 18 May 2022. Retrieved 18 May 2022.
  46. ↑ Jung, Jeong-wook (16 May 2022). "루나, 99% 대폭락…거래소서 퇴출 잇달아" [Luna Falls 99%, Leading to Continued Delistings]. The Dong-a Ilbo (in Korean). Archived from the original on 18 May 2022. Retrieved 18 May 2022.
  47. ↑ "루나-테라 폭락에 투자자 모였다…'고소 진행 중'" [Class-action Lawsuit Against Terra Looming as Harmed Investors Gather]. The Financial News (in Korean). 17 May 2022. Archived from the original on 18 May 2022. Retrieved 18 May 2022.
  48. ↑ Jin, Min-ji (18 May 2022). "Luna's Do Kwon may face legal peril, some attorneys argue". Korea JoongAng Daily . Archived from the original on 18 May 2022. Retrieved 18 May 2022.
  49. ↑ Michaels, Dave (25 October 2021). "Cryptocurrency Company Snared in SEC Dragnet Sues Regulator". The Wall Street Journal . Retrieved 14 May 2022.
  50. ↑ "SEC charges Do Kwon, Terraform with fraud in connection with Terra collapse". CNBC . 16 February 2023. Retrieved 16 February 2023.
  51. ↑ Lee, Michael (18 May 2022). "Prosecutors vowing to crack down on financial crimes". JoongAng Ilbo . Archived from the original on 18 May 2022.
  52. ↑ Hwang, Doo-hyun (18 May 2022). "부활한 '여의도 저승사자', 1호 수사로 '루나 사태' 정조준" [The Revived ‘Grim Reaper of Yeouido’ Eyes ‘Luna Crisis’ as Its First Target]. Korea Economic Daily (in Korean). Archived from the original on 18 May 2022. Retrieved 18 May 2022.
  53. ↑ Son, Hyeon-an (18 May 2022). "한동훈이 되살린 '여의도 저승사자' 1호 수사 루나" [Minister Han Revives ‘Grim Reaper of Yeouido’ to Eye Luna as Its 1st Investigation Target]. Seoul Broadcasting System (in Korean). Archived from the original on 18 May 2022. Retrieved 18 May 2022.
  54. ↑ Park, Kate; Liao, Rita (20 May 2022). "Terra creator Do Kwon faces prosecution in South Korea". Tech Crunch. Yahoo. Archived from the original on 28 May 2022. Retrieved 31 May 2022. The Seoul Southern District Prosecutors' Office said Friday that it has kicked off an investigation on Terraform Labs, the organization behind the stablecoin project Terra led by Do Kwon, and assigned the case to its Financial and Securities Crime Joint Investigation Team, a special financial crimes unit brought back recently by the newly appointed justice minister Dong-hoon Han, according to local media.
  55. ↑ "Patterson v. TerraForm Labs Pte Ltd. et al". PacerMonitor. Retrieved 18 June 2022.
  56. ↑ "Terra co-founder Do Kwon faces $79.8m lawsuit in Singapore after crypto crash". The Straits Times . 8 November 2022. Retrieved 9 November 2022.
  57. ↑ "Korea Bans Terraform Employees From Leaving Country Amid Probe". Bloomberg News . 21 June 2022. Retrieved 21 June 2022.
  58. ↑ "Arrest warrant sought for Terraform Labs co-founder". 3 November 2022.
  59. ↑ "SEC Complaint Against Binance" (PDF). SEC. June 2023. Retrieved 18 January 2025.
  60. ↑ "Will Binance Class Action Over Terra Collapse Be Forced Into Arbitration?". Reuters. 6 January 2023. Retrieved 18 January 2025.
  61. ↑ "SEC Charges Jump Trading with Manipulating TerraUSD, Secures $123 Million Settlement". U.S. Securities and Exchange Commission. October 2024. Retrieved 16 January 2025.
  62. ↑ "15 French Investors File Complaint Against Binance for Promoting UST". Journal du Coin. December 2022. Retrieved 18 January 2025.


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