The outspoken founder of Terraform Labs, Do Kwon, as said the Luna foundation Guard (LFG), a non-profit mandated to build reserves for Terra’s algorithmic stablecoin UST, is “not trying to exit its bitcoin position” after the organization loaned $1.5 billion in BTC and UST.
According to a Twitter thread Do Kwon published after the LFG Council “voted to deploy 1.5B in capital” to “allay market concerns around UST,” the founder of Terra detailed the goal of the loan was for a professional market maker to use the BTC to maintain UST’s peg to the U.S. dollar.
Do Kwon added that while “buys and sells of UST are not meaningfully directional now,” the Luna Foundation Guard felt it was “valuable to have capital ready to be deployed in the current market.” Once the market recovers, he added, the organization plans to “have the loan redeemed to us in BTC, increase the size of our total reserves.”
The Luna Foundation Guard has been building up a BTC reserve with the goal of accumulating $10 billion in BTC to back the UST stablecoin. To get to that point, the stablecoin may set aside a portion of the revenue generated from issuing UST to accumulate more BTC.
He added that the LFG hoped its on-chain BTC reserve system would be live “by the time the Terra economy would contract, thereby obviating the need for LFG discretionary intervention.” Per his words, the move will be an “important opportunity for the terra and wider crypto community to gather empirical data on how LFG operates & fits into the Terra ecosystem.
Do Kwon’s thread comes shortly after the value of the UST dropped below its $1 peg, seemingly after a series of major withdrawals on Curve and the Anchor Protocol, a lending market that offers high yields to users who deposit UST. These withdrawals were above $2 billion on Anchor, data shows.
Terra is a Proof of Stake (PoS) blockchain in which 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.
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Featured image via Unsplash.