The Crypto Whales That Backed Terra Before It Imploded

    Though the actual magnitude of the rapid implosion of Terra is unknown, many prominent venture capital companies are reported to have suffered significant losses. We look at how the crypto industry’s “Lehman moment” might affect the space’s future.

    Terra Venture capital got caught out.

    The demise of Terra has left a smudge on the portfolios of some of crypto’s most prestigious venture capital firms.

    Terra, launched by Daniel Shin and Do Kwon in 2018, rose from relative obscurity in the Layer 1 realm to become the sixth-largest crypto project by market valuation in just a few months. Terra’s dollar-pegged UST stablecoin enticed ordinary investors with promises of 20% annual returns via Anchor Protocol. Still, it also attracted some of the industry’s sharpest minds from prominent venture capital companies. Many of these funds were invested in the project’s volatile LUNA token on the blockchain.

    Terra’s believers were put to the test on May 9 when UST began to lose its dollar peg due to large sell-offs. UST and LUNA were supposed to function together through a dual token burning process to help UST keep its peg, but once it fell below $1, LUNA began to die. The price of LUNA had dropped from over $80 to less than $0.01 in less than 72 hours, effectively destroying the project and wiping out more than $27 billion in value.

    Terra’s biggest backers were Galaxy Digital and Pantera Capital, who both contributed to a $25 million investment round in January 2021. Six months later, they doubled their money by investing in a $150 million Terra ecosystem fund alongside other notable venture capital firms like BlockTower Capital and Delphi Digital.

    Terra Fallout

    The fall of Terra has been compared to the Lehman Brothers shock, which triggered the Global Financial Crisis. After experiencing significant losses from its portfolio of mortgage-backed assets, Lehman Brothers, a global financial services corporation, filed for bankruptcy in 2008. Wall Street had gotten complacent at the time, operating under the idea that the system was simply too large to fail and that if it did, the government would bail it out.

    Many venture capital firms may have made decisions based on similar thinking when investing in Terra. It’s clear how corporations may have thrown caution to the wind in such a euphoric environment, with huge players pouring billions into the crypto ecosystem and a precedent of earlier initiatives like the Wormhole Bridge obtaining hefty VC bailouts. Unlike in 2008, when the government bailed out most bankers in the interest of the economy, the crypto business has no such protector angel.

    The consequences of Terra’s collapse will most likely become clearer in the next few weeks. Janet Yellen, the US Treasury Secretary, has already mentioned Terra’s UST in her support for a stablecoin regulatory framework. “When a crypto project with so many legitimate investors fails so badly,” as crypto-journalist Laura Shin observed in the aftermath, “it will draw regulation.”

    While it’s usual for venture capital firms to make any investments with the understanding that some of them will fail, investors may start to rethink their present crypto investment strategy. Despite the recent decline in crypto asset values, the amount of money entering into crypto projects has reached an all-time high. According to Pitchbook data, venture capitalists have invested $11.65 billion in crypto and blockchain ventures this year, surpassing the $30.7 billion invested in 2021. It remains to be seen whether Terra’s collapse would dampen VC appetites for crypto. Whether Terra burnt them, even funds that completely trust blockchain technology may begin to look more cautiously about future allocations.

    If Terra’s demise is actually the crypto industry’s Lehman moment, it will most likely be viewed as a hard but essential lesson that strengthened and strengthened the space.

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