UPDATE ON TERRA TRADING - MAY 16, 2022
Wealthsimple Crypto is continuing to monitor developments affecting the Terra blockchain and LUNA token. As of May 16, 2022, Wealthsimple Crypto is supporting sell orders for LUNA for clients that currently hold a position. In light of recent developments affecting LUNA and TerraUSD, changes to the Terra blockchain protocol and pending proposals for further changes to the Terra blockchain protocol, Wealthsimple Crypto is reviewing whether to allow buy orders for LUNA.
The risks noted in the May 13, 2022 update below continue to apply. Wealthsimple Crypto may suspend support for sell orders at any time, without notice.
Further, in light of recent developments, including changes to the Terra blockchain protocol, information set out in the Crypto Asset Statement below may no longer be accurate or may become inaccurate.
Wealthsimple will continue to monitor the situation. Please check our status page for future updates.
HALT OF TERRA TRADING - MAY 13, 2022
Beginning May 7, 2022, the market price of the TerraUSD (UST) stablecoin, which is intended to maintain a market price of $1 USD, fell below $1 USD. Following this event, there has been significant minting of LUNA using the peg mechanism intended to absorb price volatility of TerraUSD. This has resulted in a rapid increase in the circulating supply of LUNA and the market price of LUNA has declined significantly. In addition, on May 12, 2022, the Terra blockchain was temporarily halted by validators twice, and changes were made to the network each time.
In light of these developments, there are additional new risks associated with trading of LUNA and/or use of the Terra blockchain:
- The Terra blockchain may be subject to further halts and/or changes.
- Wealthsimple Crypto’s liquidity providers may no longer be in a position to provide liquidity for the trading of LUNA.
- Wealthsimple Crypto may no longer be able to provide acceptable trade execution for LUNA.
- Wealthsimple Crypto may no longer be in a position to settle trades of LUNA with its liquidity providers.
Wealthsimple Crypto has determined that LUNA does not currently satisfy its requirements for trading and has halted trading in LUNA, pending further developments.
What is Terra?
Terra is an open-source protocol that allows users to create stablecoin tokens that track the price of a fiat currency. The Terra blockchain is able to host and power multiple algorithmic stablecoins on its network and has an ecosystem of applications that leverage these stablecoins. By using an algorithm to manage the supply of Terra, the token minted to create stablecoin pairs, the protocol can maintain a peg between the minted token and the fiat currency.
Terra was founded in 2018 by Daniel Shin and Do Kwon. Kwon is now the CEO of Terraform Labs, the company that manages the research and development of the Terra protocol. Terraform Labs also created and runs Anchor, a DeFi (decentralized finance) application that allows users to stake stablecoins minted on Terra, such as UST (or TerraUSD). The Terra community is engaged in decisions related to the management of Terra assets (including LUNA) through the Terra Community Trust, which holds the IP rights to Terra assets and is directed by community proposals and votes by the Terra community. Kwon, Terraform Lab’s CEO, is also a founding member of the Luna Foundation Guard, a non-profit organization dedicated to funding the continued development of a decentralized economy, primarily focused on Terra.
What is LUNA?
In order to mint Terra tokens (the pegged stablecoins), a user has to burn LUNA, the native coin of the Terra protocol. LUNA is designed to absorb any price volatility of Terra, as well as power the Terra validation and governance mechanisms. Holders of LUNA can stake their tokens to the network’s validators and earn staking rewards. Holders of LUNA can also vote on community proposals to have a say in changes made to the Terra protocol.
LUNA is the variable counterpart that maintains a stable peg for Terra so that it accurately tracks to the price of the associated fiat currency. The algorithmic model creates incentives to encourage participants to burn LUNA or mint LUNA in reaction to price fluctuations of Terra. LUNA’s value is directly correlated to the demand of Terra stablecoins.
Please note that Wealthsimple Crypto clients holding LUNA in their account cannot currently stake their tokens or participate in on-chain governance.
How does LUNA compare to Bitcoin?
First, LUNA powers the underlying proof-of-stake process for Terra, a blockchain entirely separate from the Bitcoin blockchain. Since Terra uses proof-of-stake instead of the proof-of-work method of Bitcoin, LUNA tokens are staked as part of the validation mechanism, in contrast to BTC which are mined as a result of the proof-of-work algorithm.
The second major difference between LUNA and Bitcoin is their age. Terra was launched in 2018, compared to Bitcoin’s 12 or so years. Despite this difference in age, however, Terra has rapidly reached a competitive market capitalization and level of token distribution.
However, it should be noted that although LUNA is different from Bitcoin, it is far from independent from it. Bitcoin, the coin with a larger market (by a long shot), can influence the price of all other cryptocurrencies. If Bitcoin crashes, there’s a good chance that LUNA will feel the burn too (not directly as they operate entirely distinctly, but through overall market sentiment.) It is not clear, but unlikely, that a significant drop in LUNA’s value would have a material impact on Bitcoin.
Before trading any crypto assets it is important to understand the risks. This overview is a starting point for you to perform your own research prior to investing in a crypto asset. First and foremost:
No Canadian securities regulatory authority has expressed an opinion about Terra, including an opinion that LUNA is not itself a security and/or derivative.
Wealthsimple has performed a legal assessment of LUNA prior to making it available on Wealthsimple Crypto and has concluded that LUNA is not and is unlikely to be deemed a security or derivative. However, there is a risk that this conclusion could change in the future and the impact of this on an asset’s value is outlined in our Product Disclosure.
We evaluated LUNA based on publicly available information, including (but not limited to):
- The creation, governance, usage and design of LUNA, including the source code, security and roadmap for growth in the developer community and, if applicable, the background of the developer(s) that first created Terra;
- The supply, demand, maturity, utility and liquidity of LUNA;
- Material technical risks associated with LUNA, including any code defects, security breaches and other threats concerning LUNA and its supporting blockchain (such as the susceptibility to hacking and impact of forking), or the practices and protocols that apply to them; and
- Legal and regulatory risks associated with LUNA, including any pending, potential, or prior civil, regulatory, criminal, or enforcement action relating to the issuance, distribution, or use of LUNA.
Like all other crypto assets, there are some general risks to investing in LUNA. These include short history risk, volatility risk, liquidity risk, demand risk, forking risk, cryptography risk, regulatory risk, concentration risk, electronic trading risk and cyber security risk. Each of these risks are described in more detail in our in-app Product Disclosure. Recent changes to market, liquidity, and volatility risks of LUNA are noted above in this Statement.
Operational risks: Wealthsimple Crypto currently holds all LUNA on behalf of clients using Fireblocks, our hot wallet management technology provider. Currently, our third party custodians do not support LUNA. While Fireblocks provides Wealthsimple Crypto with robust controls to protect assets (read about Multi-Party Computation here), assets held using Fireblocks are not held in cold storage or with a regulated third party custodian. Wealthsimple Crypto clients holding LUNA should be aware of this difference in custody procedures and the potential impact on security and operational risks. As soon as custodial support for LUNA becomes available, Wealthsimple Crypto will proceed with our usual custody procedures.
The Terraform Labs team and Terra community are not under any legal or regulatory obligation to disclose material information to the public regarding their activities. Holders of LUNA have no recourse to the Terra team or Wealthsimple if LUNA declines in value for any reason.
We emphasize that this Crypto Asset Statement is not exhaustive of all risks associated with trading LUNA. Investors should perform their own assessment to determine the appropriate level of risk for their personal circumstances.
WDA is offering Crypto Contracts in reliance on a prospectus exemption contained in the exemptive relief decision Re Wealthsimple Digital Assets Inc. dated June 18, 2021. Please be aware that the statutory rights of action for damages and the right of rescission in the securities legislation of each province and territory of Canada would not apply to a misrepresentation in this Statement.
Last updated: May 13, 2022