Terra’s LFG to lend OTC traders $1.5B in BTC, UST to support stablecoin peg

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Luna Foundation Guard (LFG) said on May 9 that it will lend out $1.5 billion worth of Bitcoin (BTC) and UST to defend the algorithmic stablecoin’s peg to the U.S. dollar.

Terra’s UST suffered a coordinated attack on May 8, which led to de-pegging from its $1 mark to below $0.992. 

While the de-pegging lasted for only a brief moment, it was enough to spread massive FUD about the Terra ecosystem and renewed calls of it being a “Ponzi scheme.”

However, in a move designed to protect the algorithmic stablecoin from a future reoccurrence of this kind of event, the Luna Foundation revealed that it would be working to “proactively defend the stability of the $UST peg and broader Terra economy.”

LFG is not selling BTC holdings

LFG said it will loan $750 million in BTC and another $750 million in UST to over-the-counter trading firms to protect the stablecoin’s peg to the dollar. The UST loan is designed to accumulate more BTC to stabilize the market.

The foundation was established in January as a non-profit for the Terra ecosystem. It has bought over $1 billion worth of BTC over the past few months with plans to use the flagship digital asset as a reserve for UST.

However, this move has raised concerns that the foundation was beginning to sell its Bitcoin holdings, a move that was vehemently denied by Do Kwon, the co-founder of Terra.

In his words,

(The) buys and sells of UST are not meaningfully directional now, we felt it was valuable to have capital ready to be deployed in the current market. 

As markets recover, we plan to have the loan redeemed in BTC, increasing the size of our total reserves.”

Is Terra removing liquidity from UST? 

The announcement came a day after it became clear that Terraform Labs removed liquidity from the UST stablecoin. According to transaction data, the firm removed $150 million worth of UST from Curve and another $100 million soon after.

Industry researcher Mudit Gupta questioned the move on social media, describing it as suspicious. However, Terra founder Do Kwon responded that the move was part of a plan to deploy the funds on the 4pool liquidity pool. He also asserted that the foundation had no incentive to de-peg UST.

As of press time, LUNA was trading at $59.34, down 50% from its ATH.

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