How Terra Is Using Its Bitcoin Reserves To Keep UST Stable
Terra, through the Luna Guard Foundation (LFG), has been purchasing bitcoin to use as reserves for its UST stablecoin. This has gone well according to plan and out of the $10 billion worth of bitcoin founder Do Kwon said that the foundation would be buying for its reserves, more than $2.9 billion in BTC has been added to the reserves.
However, the very nature of how these reserves are being used to maintain the peg of UST has been unknown until now. Luna Foundation Guard recently revealed the steps it was taking with its BTC reserves to continue to maintain the dollar peg.
Defend The Stability Of UST
As the market has taken a beating, stablecoins have not been left out of the onslaught. These coins which are supposed to be on a 1:1 peg with the US dollar have often seen themselves decoupling at various times. This is why these projects take various steps to continue to maintain these pegs.
Terra’s strategy with the UST is a simple one; use the largest cryptocurrency in the market to plop up the UST. This time around, it plans on doing this by taking using multiple loans in both bitcoin and UST.
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Firstly, the Luna Foundation Guard will loan $750 million in bitcoin to various over-the-counter (OTC) trading firms. Then it will also loan 750 million UST, around $750 million, to accumulate bitcoin following the market returning to normal trends. Traders will then trade the capital from both loans on each side of the market Both of these moves will help to protect the UST peg.
5/ The traders will trade the capital on both sides of the market to help accomplish both #1 and #2, eventually maintaining parity of the LFG Reserve pool (denominated in BTC) as market conditions progressively stabilize.
— LFG | Luna Foundation Guard (@LFG_org) May 9, 2022
The Luna Foundation Guard explained that “the LFG will proactively defend the stability of the $UST peg & broader Terra economy, especially under volatility and the uncertainty of macro conditions in legacy markets.”
LFG’s Bitcoin Value Falls
Like the rest of the market, the Luna Guard Foundation’s BTC reserves have also been affected by the recent decline in the price of bitcoin. The pioneer cryptocurrency has now fallen below the $34,000 level for the first time in three months.
Not only has this affected traders and investors in the space, but it has also affected the BTC reserves for the UST. Last week, NewsBTC reported that the LFG’s BTC reserves had touched as high as $2.93 billion at 80,393 coins. Today, this value sits more than $200 million lower at $2.7 billion.
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The reserves also do not hold any USDT or USDC assets as of Monday morning. While its AVAX reserves have also slid in value with the market crash to be sitting at $99.40 million presently. UST is trading at $0.9968 according to CoinMarketCap and it is now the 10th largest cryptocurrency by market cap.
Featured image from Ionos, chart from TradingView.com