The founder of Terra ($LUNA) has recently suggested that the Terra Protocol will be one of the largest holders of the flagship cryptocurrency bitcoin ($BTC) as the project creates bitcoin-denominated reserves as an additional layer of security for its decentralized stablecoin UST.
Earlier this year the Luna Foundation Guard (LFG) announced it raised $1 billion through a private token sale to build a bitcoin reserve the stablecoin, whose value is pegged 1:1 to the U.S. dollar. The funding round was led by Jump Crypto and Three Arrows Capital, and the reserve is set to increase the stability of UST.
LUNA is used to keep the algorithmic stablecoin’s peg to the U.S. dollar. While UST isn’t backed by any assets in reserve, its value is fixed through the minting and burning of LUNA as users can always swap $1 worth of LUNA for 1 UST and vice-versa.
If the price of UST drops below $1, it can be swapped for LUNA and sold for $1, making it attractive for arbitrage traders. If it goes over the $1 mark, LUNA token holders can trade tokens for 1 UST for a profit. LUNA is minted and burned to enable these transactions.
Pseudonymous decentralized finance researcher Westie has explained on social media that during bearish periods, this mechanism may lead to a “death spiral.”
The value of Bitcoin is less correlated to Terra’s ecosystem, so BTC reserves are expected to mitigate the risk of a death spiral. The Luna Foundation Guard has said that in the future it may introduce other major non-correlated assets to its reserve.
In a tweet, Do Kwon suggested that the Terra Protocol will, presumably through its reserve, become one of the largest holders of BTC.
Kwon tagged MicroStrategy CEO Michael Saylor in the tweet, as the publicly-traded business intelligence firm, which has accumulated 125,051 BTC worth over $5.4 billion. According to Westie, BTC reserve minimize the “largest risk for the peg” which is “extremely important for the long-term sustainability of the protocol
The price of LUNA, it’s worth noting, surged after the BTC reserve was announced. CryptoCompare data shows the cryptocurrency moved from around $52 last month to $93 at the time of writing, close to its $103 all-time high.
According to Binance Research, Terra is a Proof of Stake (PoS) blockchain. They also say that LUNA is “used in the issuance of stablecoins (TerraSDRs), as a price stability mechanism, as well as for staking and network governance.”
Terra was developed by South Korean blockchain company Terraform Labs, which itself was founded in January 2018 by Danial Shin and Do Kwon. Terra’s mainnet was launched in April 2019 and its native token initially saw relatively muted price performance.
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Featured image via Pixabay.