The ghost of Terra/Luna – the blockchain and algorithmic stablecoin pair that collapsed in spectacular fashion in mid 2022 – is back to haunt the news cycle.
Todd Snyder, who Delaware’s bankruptcy court appointed to oversee the wind-down of Terra/Luna parent company Terraform, has filed a lawsuit in New York against Jane Street, a quantitative trading firm with a seasoned record in cryptocurrency trading and whose alumni includes Sam Bankman Fried of FTX infamy.
The lawsuit specifically points fingers at Jane Street and one Bryce Pratt, a former Terraform intern and current Jane Street employee. The suit claims Pratt used insider information to make trades in the Terra/Luna market that ultimately led to the death of the UST stablecoin in May 2022.
On May 7, the UST stablecoin dropped below $1 and never fully recovered. Issued on the Terra blockchain, the stablecoin was algorithmic, meaning that it doesn’t have a 1-to-1 backing with dollar instruments like Tether’s USDT or Circle’s USDC. Instead, market incentives and a programmatic relationship with luna, UST’s companion token, attempted to maintain the peg: if UST traded above $1, traders could profit by burning $1 worth of Luna to mint one UST, increasing supply and pushing the price back down; if UST fell below $1, traders could burn one UST to receive $1 worth of Luna, reducing supply and pushing the price back up.
This arbitrage worked until it didn’t, and May 7’s depegging eventually shattered market confidence as traders sold UST and sent it into a death spiral.
Snyder’s lawsuit on behalf of Terraform and traders who lost money in the debacle alleges that Jane Street’s trading incited it, and the plaintiff is seeking damages as part of its efforts to recoup money for investors as Snyder liquidates Terraform’s assets.
Nearly four years after the failure of UST and luna, the lawsuit implicates Jane Street in yet another crypto blowup that singed investors.
And bizarrely, this has led to a number of pet theories that, maybe, Jane Street has actually been behind the current drawdown in bitcoin’s price.
Breaking down the lawsuit against Jane Street: Who is Bryce Pratt?
Pratt worked as an engineering intern at Terraform in the summer of 2021. While there, the lawsuit says, he developed close personal relationships with key Terraform personnel, including Terraform’s Head of Research, and was subject to Terraform’s Code of Ethics, which explicitly prohibited sharing material non-public information (MNPI) about Luna tokens with outsiders.
By September 2021, Pratt joined Jane Street, and in February 2022, he introduced two Jane Street DeFi trading leads to Terraform’s Head of Business Development to “[open] up lines of communication regarding OTC and other forms of investment in Terra,” according to the suit.
The lawsuit further alleges that Pratt received insider information from Terraform employees, particularly its Head of Research, who the suit claims applied for a job at Jane Street in late March 2022.
In this heavily redacted section, the lawsuit claims that Pratt emphasized the need for secrecy over these conversations, texting “don’t share pls” to the Head of Research.
When things fall apart: The heart of the Jane Street lawsuit allegations
The crux of the plaintiff’s claims rest on Terraform’s migration of one of UST’s primary liquidity pools. Per the suit, by mid-April in 2022, Terraform announced that it would be reducing the 20% interest rate on its staking protocol, Anchor, the engine for UST demand that drove the entire Terra ecosystem.
Concurrent with this, Terraform announced that it would be migrating all of the UST it had staked in a Curve liquidity pool (3pool) to a new one (4pool). These DeFi liquidity pools allowed traders to swap UST for other stablecoins in the pool, making them a critical piece of the UST’s liquidity profile and the Terra ecosystem even if they were exogenous to it.
Terraform announced the change, but it didn’t mention a date for the withdrawal. On May 7, per the suit, the company withdrew $150 million without announcing the fund movement. Ten minutes after this withdrawal, the lawsuit claims, Jane Street sold $85 million UST in what the suit says was the largest single swap in the pool.
This trade – executed into a trading pool with shallow liquidity for UST after Terraform’s withdrawal from it – spurred UST’s collapse, the lawsuit claims. It goes on to allege that Jane Street profited from UST’s unraveling, acting on non-public information obtained through insider channels at Terraform, as well as information related to Jump Trading’s covert efforts to stabilize the collapsing ecosystem.
How exactly they allegedly profited isn’t clear from the suit, as the section is basically inked out with redactions.
Break out the tinfoil
Is any of this true, and will Snyder make a convincing case? We’ll find out in the discovery process.
Some commentators at least believe enough from the lawsuit to claim that you can draw a line from Jane Street to bitcoin’s crash in 2022. (You can make a plausible argument, at least, that Terra/Luna’s downfall was the first domino in a sequence of liquidity crises that would eventually topple FTX).
Some have taken this line of thinking so far as to canonize an all new Bitcoin conspiracy theory – that Jane Street is responsible for the daily, U.S.-market open selling that has been driving bitcoin into the dirt since October.
Without giving this too much air – because to be clear, the evidence is very sparse – theorists are pointing to the fact that bitcoin surged the day of the lawsuit. The idea is that, as an authorized participant in bitcoin ETF creation and redemptions, Jane Street is dealing in paper bitcoin, fraudulently redeeming ETF shares for bitcoin and then market selling that bitcoin to artificially suppress the price.
The theory is cute, but there’s nothing to substantiate it. It’s entirely born of the coincidence of bitcoin’s rally after the lawsuit was filed and assuming fraud and insider trading on behalf of Jane Street in the collapse of Terra/Luna.
And that’s not to defend Jane Street, but we’re going to need a little more smoke than that to call the firm the source of the fire that has been immolating bitcoin’s market for the last four months.
