The former head of FTX could be involved in the
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The former head of FTX could be involved in the collapse of cryptocurrency Terra

US prosecutors have launched an investigation into former head of crypto exchange FTX and its affiliate Alameda Research, Sam Bankman-Fried. The businessman is suspected of manipulating the cryptocurrency market, which led to the collapse of the algorithmic stablecoin Terra — earlier this year alone the project was valued at $40 billion, he reported New York Times citing their own sources.

    Image source: sergeitokmakov / pixabay.com

Image source: sergeitokmakov / pixabay.com

The stable cryptocurrency TerraUSD (UST) based on the algorithm interacted with the existing cryptocurrency Luna in the same ecosystem. When the price of UST exceeded the face value of $1, investors were interested in trading Luna for UST while making a profit, and vice versa – therefore, the circulation of UST had to be kept under control. The system’s operation was disrupted when traders lost confidence in one of the cryptocurrencies – the prices of the second subsequently collapsed, causing both digital assets to almost completely lose their value in a matter of days.

Decentralized lending service Anchor, which runs on the Terra blockchain, reduced its yield to 18% in early May, which was the first signal of possible ecosystem instability. On May 7th, Terraform Labs, which issues UST, withdrew $150 million worth of assets from Curve exchange platform accounts – Terraform founder Do Kwon justified the move with the intention to place more funds into the exchange pool. But a minute later, an unknown owner of another wallet exchanged $84 million in UST for funds in another stablecoin – USDC. Between May 7th and May 8th, a similar exchange was spotted in another 12 wallets totaling $321 million. Seven of those wallets have withdrawn funds since January, while the total outflow from the first account that served as first for Was exchanged $ 84 million, amounted to $ 193 million.

All these processes led to an asset imbalance in the Curve pool, which turned out to be more than other tokens. The protection mechanism of the Luna Foundation Guard, a fund created by Terraform to keep the value of UST at $1, has been activated. The bitcoins stored there for these purposes were taken out of reserve, which overlaid the general pessimism of the market with cryptocurrency scams, and the price of bitcoin itself plummeted. But it was already impossible to stop the avalanche: by that time, more than $10 billion had been withdrawn from Anchor.

The situation has been exacerbated by the actions of unknown players on cryptocurrency exchanges such as Binance and FTX. On May 8, a certain person placed a large number of sell orders for UST on Binance – in the absence of a corresponding number of buy orders, the price of the asset on the site collapsed, and reallocating UST to the dollar was out of the question. Additionally, according to a New York Times source, a significant portion of those orders were placed by a company owned by Sam Bankman-Fried, the former head of FTX. And the same company, the source continues, began actively “shorting” the UST-linked Luna token, that is, playing on its case.

Under normal conditions, these processes could have been profitable, but in reality, they caused the collapse of the entire ecosystem, causing investors to lose about $1 trillion in total, several companies going bankrupt, and a crisis erupting in the entire cryptocurrency industry.

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Robbie Elmers

Robbie Elmers is a staff writer for Tech News Space, covering software, applications and services.

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