Did FTX play a role in the Terra Luna collapse?

9 Dec 2022 , 11:04 AM

The latest development in the fall of crypto guru Sam Bankman-Fried has led to a reconsideration of the Terra algorithmic stablecoin ecosystem's collapse, which earlier this year destroyed almost $40 billion in market value.

According to a New York Times report citing people with knowledge of the situation, US prosecutors are reportedly looking into Bankman-Fried, the founder of the defunct cryptocurrency exchange FTX and its sister trading platform Alameda Research, regarding his potential involvement in planning the demise of TerraUSD (UST) and its associated token Luna.

Separately, Bloomberg News reported that federal prosecutors in Manhattan looking into the failed exchange met this week with FTX's new CEO and bankruptcy attorneys.

The symbiotic link between the two tokens, which was controlled by automated code to regulate circulation, served as the backbone of the Terra ecosystem. The idea was to limit the circulation of UST by encouraging traders to exchange Luna for UST at a profit and vice versa if the price of UST rose over $1.

But when investors lost faith in one, they also lost faith in the other. As a result, they became trapped in a "death spiral," which caused their value to fall to almost zero in a matter of days in May.

It's still unclear whose activities caused the downturn to start. This transaction had two parties. The first is the side that on-chain traders can see, where wallet addresses were clearly exchanging UST for other tokens, which set off a panic in the market.

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