Avalanche Foundation to Repurchase Tokens from Terra's Bankruptcy Estate Amid Market Disparities

The Avalanche Foundation has announced its plan to repurchase 1.97 million AVAX tokens that it previously sold to the Luna Foundation Guard (LFG) in April 2022. This decision comes as part of a settlement filed on October 9, 2024, in Delaware Bankruptcy Court, which now awaits court approval.

The foundation intends to buy back the tokens from Terraform Labs’ bankruptcy estate for $45.5 million. However, these tokens are currently valued higher at $57.4 million, presenting a notable market discrepancy.

Safeguarding Token Use and Reducing Complexity

According to the Avalanche Foundation, this move ensures that LFG will not violate the initial agreement’s terms, which imposed restrictions on how the tokens could be used. The foundation's action also protects the tokens from being entangled in the complexities of bankruptcy proceedings. By repurchasing the AVAX tokens, the foundation regains 1.97 million AVAX tokens and returns them to its holdings.

Terraform Labs, the entity behind the Terra blockchain, noted that the settlement would lower litigation costs and leave more assets available for distribution to creditors. The firm added that the settlement amount aligns closely with the current market value of the AVAX tokens, helping it recover a substantial portion of the funds.

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The Original AVAX Sale and Collapse of Terra

LFG, a nonprofit tasked with maintaining reserves for Terra’s stablecoin TerraClassicUSD (USTC), originally purchased the AVAX tokens in April 2022 for $100 million. This purchase was intended to strengthen Terra’s ecosystem through strategic alignment of incentives.

However, less than a month later, Terra’s stablecoin lost its peg to the U.S. dollar, plummeting to a value as low as $0.006. The collapse also caused the market capitalisations of Terra Luna Classic (LUNC) and USTC to shrink by nearly $60 billion, according to CoinGecko data.

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Bankruptcy Proceedings and Financial Settlement

Terraform Labs has since entered bankruptcy, and in June 2024, it reached a $4.5 billion settlement with the U.S. Securities and Exchange Commission (SEC). Following this, the firm moved to wind down its operations. The repurchase agreement, currently awaiting court approval, is a crucial part of this process.

The settlement amount for the AVAX tokens was calculated based on a volume-weighted average price of the tokens over a seven-day period in early August 2024. Terraform Labs' winding down plan, meanwhile, estimates potential payments between $185 million and $442 million, though total losses are difficult to quantify.

The repurchase by Avalanche highlights the complexities of managing assets tied to collapsed ecosystems like Terra. As Terraform Labs winds down, this agreement offers a resolution that minimises further financial complications for both parties.