Terra $45bn face plant creates crowd of crypto losers

This week’s undoing of the TerraUSD algorithmic stablecoin and its sister token Luna has ramifications for all of crypto. First, there’s the immediate impact: The rapid collapse of a once-popular pair of cryptocurrencies sent a ripple effect across the industry, contributing to plummeting coin prices that wiped hundreds of billions of market value from the digital-asset market and stoked worries over the potential fragility of digital-asset ventures.

Then there are the knock-on effects. In addition to delivering punishing losses to individual users and investment firms, the spectacular failure of a market darling like Terra threatens to have a cooling effect on the fundraisings that have jacked up crypto startups’ valuations in recent years. Venture capitalists who have long been some of the industry’s biggest cheerleaders may not have quite the same risk tolerance now — especially those directly caught in the crossfire.

“It’s something the scale of which crypto has really never seen in terms of a top-five project just absolutely imploding,” said Matt Walsh, founding partner of Castle Island Ventures, a blockchain-focused VC firm. Almost $45 billion evaporated from the market caps of TerraUSD (known as UST) and Luna over the course of a week, according to CoinGecko.

There were some winners in this scenario — like the investment firms including F9 Research that shorted TerraUSD. Stablecoins backed by reserves rather than algorithms also came off looking like better options. But it’s the losses from these bruising past few days that will resonate.

Read: TerraUSD’s stablecoin meltdown holds the crypto market hostage

Individual holders of UST and Luna, the token that’s part of the peg mechanism for the algorithmic stablecoin, are now deeply in the red, with tweets lamenting dashed fortunes flooding Crypto Twitter this week.

“The biggest losers from all of this will be retail [investors] that didn’t understand the risks they were taking,” said Kyle Samani, co-founder and managing partner at crypto VC firm Multicoin Capital.

Other losers include the venture capitalists and investment firms that have backed Terraform Labs, the startup behind UST, and Luna Foundation Guard, the nonprofit managing the Luna token. Galaxy Digital Holdings Ltd., Pantera Capital and Lightspeed Venture Partners invested in Terraform’s last $150 million fundraise in July, while Jump Crypto and Three Arrows Capital participated in a $1 billion sale of Luna tokens in February.

These backers, who once hoped that their investments would deliver massive returns, instead found themselves being solicited to prop up UST and Luna in a $1.5 billion backstop. In essence, they were asked to “put their money where their mouth is,” a test of whether these institutions actually believe in what they’re investing, said Billy Dishman, investment and research analyst at crypto VC firm CoinFund. So far, they haven’t shown much interest.

Terraform Labs is working on another contingency plan in which ownership of the blockchain network would be distributed to investors, according to a blog entry posted Friday that was attributed to co-founder Do Kwon.

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