The organization spent ~$2,8 billion to save the algorithmic stablecoin

​Audit confirms the use of LFG’s reserve fund to restore USTC’s peg

16.11.2022 - 14:15

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3 min

JS Held, an experienced third-party auditing firm, was hired to conduct a technical audit providing full transparency into the trading, blockchain records, and efforts of The Luna Foundation Guard (LFG) and Terraform Labs (TFL) to defend the price of TerraUSD (UST) between May 8th and May 12th, 2022.

LFG and TFL engaged with JS Held to bring transparency into the peg defense activity in the May of 2022, and in the process to answer the following allegations posed in social media:

  • Were any LFG funds misappropriated, embezzled or stolen?
  • Were any LFG funds used to benefit insiders?
  • Does LFG hold funds other than its publicly declared wallets?
  • Were any of LFG’s funds frozen?

To aid with the audit, JS Held was given access to on-chain wallets and trading accounts at CEXs used by the peg defense, and worked with primary raw data instead of relying solely on TFL’s representations. No compensation paid to JS Held was conditional on positive findings.

The audit report, which can be viewed in its entirety here, concluded that:

  • LFG spent ~$2.8B (80,081 BTC and 49.8M in stablecoins) to defend UST’s peg, consistent with LFG’s tweets on May 16th, 2022
  • Additionally, TFL went above and beyond and spent $613M of its own capital to defend UST peg

The report shows that all LFG funds were spent to defend UST’s peg parity with the Dollar as declared, and that LFG’s remaining balances are the only funds remaining. Naturally, this dispels the following allegations:

  • Embezzlement or misuse of funds → all funds were used for peg defense
  • LFG funds used to benefit insiders → all peg defense occurred in open markets, with no special preference for any party
  • LFG funds frozen by law enforcement → all LFG funds are kept in self-hosted wallets, have not moved since the May 16th tweet, and have not been frozen

In addition to TFL using $0.6B of its proprietary capital for peg defense, it is important to note that LFG was 100% funded by donations from TFL to build exogenous reserves for Terra stablecoins. While those reserves were unfortunately insufficient to defend against extreme market volatility and eventually led to UST depegging, LFG lived up to its mandate fully to do everything within its resources to prevent that outcome.

“While there have been multiple recent failures in crypto, it is important to distinguish between Terra’s case, where a transparent, open-source decentralized stablecoin failed to maintain peg parity and its creators spent proprietary capital to try to defend it, and failure of centralized custodial platforms where its operators misused other people’s money (customer funds) for financial gain. We hope that this report shows our organizations’ commitment to transparency and the wider crypto ecosystem, and we are more committed than ever to learn from our failure and continue to build systems that are more transparent, decentralized, and resilient.”- Do Kwon, founder of Terraform Labs

This material is taken from the website medium.com.

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