Terra’s stablecoins, primarily UST, will now be backstopped by Bitcoin.
A billion dollars worth of BTC will be set aside by the Luna Foundation Guard (LFG) to act as a backstop for UST and other Terra stablecoins in case they lose their pegs, as first reported by The Block.
$1B of LUNA
LFG was announced in January, and is a non-profit foundation dedicated to advancing “greater economic sovereignty, security, and sustainability of open-source software and applications that help build and promote a truly decentralized economy.” It provides grants in the areas of open source development, community growth and research and development.
Apparently, it also runs reserve funds.
“The $UST Forex Reserve is an LFG initiative to provide a further layer of support for the $UST peg using assets that are considered less correlated to the Terra ecosystem, like Bitcoin,” the official Terra Twitter account announced today.
“One common criticism of algorithmic stablecoins is their reflexive nature and the hypothetical risk of a ‘bank run’ scenario where demand to sell the stable outstrips supply in a way that causes compounding price decreases in both native tokens,” the Terra account tweeted later in the same thread.
While the mechanics weren’t spelled out, it seems that the idea is that if there were a run on UST (or another stablecoin minted by Terra), LFG could buy it off the market using its BTC reserves as a way to prop up demand.
At current prices, that reserve would amount to approximately 26K BTC.
However, the precise terms of the deal have not been disclosed. Terraform Labs (which built the Terra blockchain), LFG, Jump and Three Arrows were not immediately available for comment.
The LFG announcement said that “The LFG will initially be funded with a 50 million LUNA gift from TFL to help bootstrap its stabilizing reserves and grants framework.”
Presumably, the investors bought a portion of that supply, though the specifics were not disclosed. At current prices, that would mean that LFG sold roughly 18.7M LUNA tokens, in the unlikely event that investors bought at retail prices.
LUNA traded at around $53.42 when the news was released at 11AM New York time. Though it briefly spiked to $55.25 shortly thereafter, it has settled back down to $53.62 in late afternoon trading.
LUNA’s market cap is $20.7B according to CoinMarketCap, which makes it the 9th largest coin after SOL, the native token of the Solana blockchain.
On Feb. 17, Terraform Labs co-founder Do Kwon tweeted that reserves had been topped up with a $450M deposit of Terra’s dollar-pegged stablecoin, UST.