The collapse of cryptocurrency TerraUSD has traders wondering what happened to the $3 billion war fund designed to defend it.

TerraUSD is a stable coin, meaning its value should be stable at $1. But after the collapse earlier this month, the coin is worth just 6 cents.

For about two days earlier this month, a nonprofit foundation backing TerraUSD deployed nearly all of its bitcoin reserves to help it regain its typical $1 level, according to an analysis by cryptocurrency risk management firm Elliptic Enterprises Ltd. Despite the massive deployment, TerraUSD has deviated further from its expected value.

Stablecoins are part of a cryptocurrency ecosystem that has grown dramatically in recent years, accounting for about $160 billion of the $1.3 trillion cryptocurrency world as of Monday. As their name implies, these assets are supposed to be non-volatile cousins of bitcoin, dogcoin and other digital assets that are prone to large swings.

In recent months, cryptocurrency traders and market observers have taken to social media to warn that TerraUSD could deviate from its $1 peg. As an algorithmic stablecoin, it relies on traders as a backstop to maintain the value of the stablecoin by giving them rewards. Some have warned that if traders’ desire to hold these coins wanes, it could cause a wave of selling against both, a so-called death spiral.

To avoid those concerns, Do Kwon, the South Korean developer who created TerraUSD, co-founded Luna Foundation Guard, a nonprofit organization that is partly responsible for building a large reserve as a backstop for confidence. Mr. Kwon said in March that the organization would buy up to $10 billion in bitcoin and other digital assets. But the organization didn’t accumulate that much before the collapse.

Mr. Kwon’s company, Terraform Labs, has been funding the foundation through a series of donations since January. The foundation also raised $1 billion to jumpstart its bitcoin reserves by selling that amount in sister tokens, Luna, to cryptocurrency investment firms including Jump Crypto and Three Arrows Capital, and announced the deal in February.

As of May 7, the foundation had accumulated about 80,400 bitcoins, which were worth about $3.5 billion at the time. It also has nearly $50 million worth of two other stablecoins, tether and USD Coin. issuers of both have said their coins are backed by U.S. dollar assets and can easily be sold to meet redemptions. The reserve also holds the cryptocurrencies Binance coin and Avalanche.

Traders’ desire to hold both assets waned after a series of large withdrawals of stablecoins from Anchor Protocol, a crypto bank where users park their funds to earn interest. This wave of selling intensified, causing TerraUSD to fall below $1 and Luna to spiral upward.

The Luna Foundation Guard said it began converting reserve assets to stablecoin on May 8 as the price of TerraUSD began to fall. In theory, selling bitcoin and other reserves could help stabilize TerraUSD by creating demand for the asset as a way to revive faith. This is similar to how central banks defend their falling local currencies by selling currencies issued by other countries and buying their own.

The foundation says it transferred bitcoin reserves to another counterparty, enabling them to make large transactions with the foundation. In total, it sent more than 50,000 bitcoins, about 5,000 of which were returned, in exchange for about $1.5 billion in Telamax stablecoins. It also sold all of its tether and USDC stablecoin reserves in exchange for 50 million TerraUSD.

When that failed to support a $1 peg, the foundation said Terraform sold about 33,000 bitcoins on May 10 on behalf of the foundation in a last-ditch effort to bring the stablecoin back to $1, in return for which it received about 1.1 billion tera coins.

To execute these transactions, the foundation transferred the funds to two cryptocurrency exchanges. Gemini and Binance, according to Elliptic’s analysis.

While large cryptocurrency exchanges may be the only institutions in the ecosystem that can quickly process the large transactions required by the foundation, this has caused concern among traders as TerraUSD and Luna have soared. Unlike peer-to-peer transfers of cryptocurrencies, specific transactions executed within a centralized exchange are not visible on the public blockchain, the digital ledger that underpins cryptocurrency transactions.

Despite the foundation’s timeline, the inherent lack of transparency has raised investor concerns about how some traders will use those funds.

“We can see the movement on the blockchain, we can see the transfer of funds to these large centralized services. We don’t know the motivation behind these transfers or whether they are transferring funds to another actor or transferring funds to their own accounts on these exchanges,” said Tom Robinson, co-founder of Elliptic.

The Lunen Foundation Guard did not respond to an interview request from The Wall Street Journal. Mr. Kwon did not respond to a request for comment. The foundation said earlier this month that it still has about $106 million in assets that it will use to compensate TerraUSD’s remaining holders, starting with the smallest ones. It did not provide specific details about how that compensation would be made.