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Terra's collapse causes crisis for Avalanche

24 May, 2022
Terra's collapse sparked a crisis in Avalanche

The collapse of Terra's UST project, which was the third-largest stablecoin by market cap, has cast a shadow over the entire decentralised finance sector. Over the last 30 days, cross-chain bridges lost 20% of their capitalisation, while the total locked value in DeFi was halved to $88 billion.

Image source: defillama.com

Until very recently, Terra sat in second place after Ethereum in the DeFi market, a fact that only served to increase investment in the project both among traders and potential partners. Its fans included the Avalanche team, which worked with Terra on several joint projects. In order to strengthen their partnership, the two companies even exchanged each other's coins. Terra received $200 million worth of AVAX, while Avalanche got $100 million of LUNA and $100 million of UST in return.

Before Terra's collapse, Avalanche ran into problems when trying to expand its network. As a result, the team decided to launch its Avalanche Multiverse programme, putting together a $290 million fund to lure third-party developers (we wrote about this in April). But the situation now looks increasingly dire for this project which, just a few months ago, counted itself among the Top 10 coins by market cap.

Image source: StormGain cryptocurrency exchange

In an attempt to maintain UST's tie to the US dollar, Terra used virtually all of its 80,000 BTC reserves. However, the company's 2 million AVAX ($60 million at current prices) remained untouched. Now the company is deciding what is going to happen to the project, and one option it is considering is to use its remaining reserves to compensate small investors for losses they incurred.

The problem is complicated further by the initiation of an investigation by South Korean law enforcement, as well as by the South Korean Information Agency's revelation that Terraforms Labs owes 100 billion won (~$79 million) to the country's tax authorities. If Terra suddenly decides to take its 2 million AVAX out of the market, this will lead to a significant drop in the token's value and could spark panic selling among its remaining holders.

StormGain analytical group

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