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Ethereum co-founder says every ‘average smallholder’ impacted by Terra’s stablecoin crash should be made whole, cites FDIC’s $250,000 as ‘precedent’

May 15, 2022, 9:50 PM UTC

The Terra ecosystem completely unraveled last week, taking much of the cryptocurrency market down with it. Its algorithmic stablecoin TerraUSD (UST) crashed far below its $1 peg, and its sister token Luna collapsed to nearly zero.

Though the overall market is now recovering, the demise of UST and Luna wiped out many cryptocurrency investors’ life savings. This left the Terra community, including its creator Do Kwon, proposing plans to somehow fix the damage done.

One proposal on the Terra forum suggests that Terra should make investors “whole” again with its remaining funds—and Ethereum co-founder Vitalik Buterin is all for it, with a few tweaks.

Buterin agreed with one Twitter user who said that Terra should prioritize helping “smaller wallets,” or people who had “a couple thousand or more of UST deposited in Anchor,” rather than “rich whales.”  

“​​If Terra just focussed on the ‘poorest’ 99.6% of wallets, then they could make this gigantic group 100% whole,” the user Tweeted on Friday

Buterin retweeted the user on Saturday, saying: “Strongly support this. Coordinated sympathy and relief for the average UST smallholder who got told something dumb about ‘20% interest rates on the US dollar’ by an influencer, personal responsibility and SFYL [or sorry for your loss] for the wealthy.”

He added that the “obvious precedent is FDIC insurance,” being “up to $250,000 per person.”

The Federal Deposit Insurance Corporation is a federal agency that dates back to the 1930s, a Great Depression-era regulation that represented the first time the government backed bank deposits in U.S. history. It was part of the New Deal series of government programs that restored faith in the financial system, yet came under criticism of too much government involvement in business.

Buterin stopped short of endorsing regulation for the until-now unregulated crypto space, but he said similar regulations were “interesting.” His comments are newsworthy in light of President Joe Biden signing an executive order in March, directing the government to ““ensure responsible innovation in digital assets,” with the crypto community wondering what “responsible” means.

“An interesting unrelated one is Singapore employment law,” Buterin tweeted. “Stronger regulation for low-earning employees, and a more figure-it-out-yourself approach for the wealthier. IMO [or in my opinion] things like this are good hybrid formulas.”

Buterin also criticized algorithmic stablecoins on Twitter, saying that “‘algostable’ has become a propaganda term serving to legitimize uncollateralized stables by putting them in the same bucket as collateralized stables.” 

He added that “we need to really emphasize that the two are very different.”

UST is an algorithmic stablecoin, which means it has no reserves. Instead, it holds value based on an algorithm that is coded to strike a balance between the stablecoin and a partner coin, in this case, Luna. Every time a UST token is minted, the equivalent of $1 in Luna is burned, or removed from circulation, and vice versa, to maintain the peg.

As the UST stablecoin dropped, it brought its sister token Luna down with it. 

UST is trading at around 14 cents, down 85% in the last seven days. Luna remains at a 100% loss in the same timeframe, trading at pretty much zero.

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