"Last week, Do Kwon, a man who a few years ago was one of the most famous names in the cryptocurrency world, pleaded guilty to one count of conspiring to commit commodities fraud, securities fraud, and wire fraud and one count of committing wire fraud in connection with fraudulent schemes. His actions caused a major crypto crash in 2022 which vaporized $30 billion in wealth and for some created tax problems in addition to financial loss."
"But UST did not have a cash reserve to peg its value. Instead, its peg to the U.S. dollar was based on an algorithm that encourages trader arbitrage. For example, if the value of one UST becomes less than $1, people can buy UST, convert it to Luna, and then sell that Luna for a profit. Conversely, if the value of one UST is greater than $1, people can buy $1 worth of Luna, convert it to UST, then sell the UST for a profit."
"Kwon also established the Anchor Protocol to incentive use of UST. Anchor was advertised as a savings platform where people would deposit their UST and receive a guaranteed 20% interest. At that time, high-yield savings accounts offered at most 1%. The unusually high return rate attracted investors, mostly people looking for alternative investments. In May 2022, a very large UST trade caused it to lose its peg and stability."
Do Kwon and Terraform Labs created two cryptocurrencies, Luna and the algorithmic stablecoin UST. UST relied on an arbitrage-based algorithm rather than cash reserves to maintain a $1 peg, allowing traders to swap UST and Luna to profit from deviations. Kwon launched Anchor Protocol offering a promised 20% yield on UST deposits, attracting many investors. In May 2022 a large UST trade caused the peg to break, triggering massive Luna issuance that devalued both tokens in a cascading death spiral. The collapse wiped out roughly $30 billion and led to civil lawsuits and criminal investigations resulting in guilty pleas.
Read at Above the Law
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