WASHINGTON — In May, the collapse of one of the most popular U.S. dollar-pegged stablecoin projects cost investors tens of billions of dollars as they pulled out in a panic that some have compared to a bank run. But before that, the stablecoin known as terraUSD (or UST, for short) and its sister token luna, had experienced a pretty spectacular run-up — and some investors made a killing before it all collapsed.
Venture capital firm Pantera Capital tells CNBC it earned a 100-fold return on its $1.7 million investment in luna. Hack VC and the Winklevoss-backed CMCC Global didn’t share their exact gains, but CMCC told CNBC that it closed its luna position in March, while Hack reportedly got out in December.
The scheme relied largely on faith and the promise of future returns, plus a complex set of code, with very little hard cash to back up the whole arrangement.
Unlike USDC (another popular dollar-pegged stablecoin), which has fiat assets in reserve as a way to back their tokens, UST was an algorithmic stablecoin created and administered by Singapore-based Terraform Labs. It depended on computer code to self-stabilize its value by creating and destroying UST and luna in a sort of supply-and-demand seesaw effect.
For a while, it worked.
UST held its dollar peg and the luna token soared. The luna token rose to more than $116 in April, up more than 135% in less than two months. Traders were able to arbitrage the system and profit from deviations in the price of the two tokens. But perhaps the greatest incentive of the entire scheme was an accompanying lending platform, called Anchor, which promised investors a 20% annual percentage yield on their UST holdings — a rate many analysts said was unsustainable.
Widespread buy-in — and public PSAs — from respected financial institutions lent credibility to the project, further driving the narrative that the whole thing was legit.
Most everyone was happy until it all came crashing down in early May.
Although the project had amassed about $3 billion worth of bitcoin in its reserves as a backstop for UST, when the price of luna became unstable, investors rushed out of both tokens, sending prices off a cliff. The Luna Foundation Guard tried to restore UST’s $1 peg by spending almost all of the bitcoin in its reserve. It didn’t work.
At their height, luna and UST had a combined market value of almost $60 billion. Now, they’re essentially worthless.
The entire episode has laid bare the advantages of experienced large-scale investors over retail investors gambling on hope.
One person posted on Reddit that they didn’t think they would have enough money to pay for their next semester at school after losing money on luna and UST. Another investor affected by the crash tweeted that she and her husband sold their house and bet it all on luna, noting that she was still trying to digest whether it was actually happening or just a nightmare.
Others are contemplating suicide after losing all they’ve got.
“I’m…