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What to learn from the UST collapse when it comes to ESG

The crypto world has gone berserk after TerraUSD (UST) plummeted within hours. The crash is indicative of how poor governance practices can come back to bite you. Read more in our analysis.

What happened? Unless you've been living under a rock, you've heard about the fall of TerraUSD (UST). Formerly known as the 10th largest cryptocurrency, it lost 70 percent of its value in a matter of hours on May 11 of this year, trading at just 30 cents (instead of the targeted one U.S. dollar) at times. Needless to say, the crypto world went into a frenzy.

We analyzed the token a few weeks prior to the crash and gave it a C+ in the governance category (check our ratings for tokens). Let's take a quick look at the reasoning behind the low score to learn more about the relationship between risk management and governance criteria in the ESG context.

Reasons for the low governance score

  • Terraform Labs, the operator of UST, was subject to an SEC (security exchange commission) investigation back in November 2021.

  • Logarithmic stablecoins are still a very young category of dollar assets and have yet to prove their value. The risks associated with such assets are higher than average.

  • Those who invested their assets in USTs received a return of nearly 20 percent. Such a high return indicates a high-risk investment.

  • Terraform Labs autonomously determines the fate of UST. There is no say or opportunity for co-determination.

  • It is unknown where Terraform Labs is domiciled. This is particularly relevant for questions around potential legal difficulties. In the event of a criminal prosecution, it is not transparent how and where the UST operator can be prosecuted.

  • It is unclear who exactly is behind Terraform Labs. It is not clear from public information who is running the company and how the management is composed.

  • There are obvious conflicts of interest between Terraform Labs and its investors.

  • During our research, we were unable to find any information on regular audits, as is the case with many comparable projects.

Bottom line

All in all, it is safe to say that Terraform Labs is quite intransparent compared to similar projects. The evaluation of the governance criteria allows for a statement on the "management" and thus on the risks of such tokens, especially in comparison with its peers.

We last reviewed UST in all three ESG categories on April 7, 2022, assigning the following scores:

  • Environmental: A-

  • Social: B+

  • Governance: C+

Prior to the crash, UST's overarching ESG rating settled at a C.

For more information on how we rate coins and tokens, have a look at the blogs linked below.

Disclaimer: Please note that this blog is intended for your entertainment and does not constitute financial advice.


What is the GCR Sustainability Rating?

The GCR Sustainability Rating is the first ESG rating tailored to cryptocurrencies and adjusted accordingly. It reflects the holistic assessment of a cryptocurrency and is composed of three individual scores:

The GCR Sustainable Rating is a relative ranking, meaning that the best cryptocurrency in each category receives an A rating, while the worst receives a D rating. The overall rating ("GCRS rating") is based on three individual ESG categories. An average score is calculated for each category. The overall rating corresponds to the worst ESG score so that failures in a single category cannot be compensated for by good scores in the other two. Thus, if a cryptocurrency is judged not to be environmentally sustainable, it cannot make up for the poor rating with adequate social standards or good governance.

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