The Luna Foundation Guard (LFG) has received another $880 million in crypto following its $100 million Bitcoin purchase on Tuesday—this time in the form of a “gift” from Terraform Labs, the developers of the Terra blockchain.
The LFG, responsible for building the reserves backing the TerraUSD (UST) stablecoin, reported total reserves worth $2.3 billion at the time of Tuesday’s Bitcoin buy. While three-quarters of those reserves were in Bitcoin, the recent LUNA transfer has now eaten up some of that share.
But this may not be the case for long. Public blockchain data indicates that the LFG dumped 78% of that 10 million Terra (LUNA) less than four hours after receiving it. From there, the LUNA has been swapped for UST in batches of 1,000 tokens at a time.
Stablecoins are tokens that are designed to keep their peg to a given fiat currency and are typically backed by some form of collateral. At the moment, UST maintains its peg to the dollar using LUNA—the 9th largest cryptocurrency by market cap. LUNA reserves are burned when UST’s price moves above a dollar. Conversely, traders may arbitrage the difference if UST’s value moves below the peg.
Terra co-founder Do Kwon, however, has recognized that this is an unstable long-term model for price stability. It could eventually lead to a “debt spiral” situation wherein too many users attempt to redeem their UST for LUNA at one time, leading to major LUNA devaluation.
As such, the LFG has pivoted toward backing its stablecoin with Bitcoin instead—which has a far larger, more liquid, and more established market than LUNA. “If you look at Bitcoin, it turns over more than $20 billion per day,” Kwon told Bloomberg earlier this month. “I think with time, it’s going to be even more liquid.”
The foundation now holds 42,406 Bitcoin, all of which were accumulated this year alone. Other cryptocurrencies take up smaller shares of their reserves, including USDC, USDT, and LUNA. LFG is also planning a $100 million purchase of AVAX—the Avalanche blockchain’s native cryptocurrency. The extra diversification “offers a more robust asset pool to defend against volatility,” according to Terraform Labs head of research in a press release.
The foundation’s near term target for Bitcoin reserves is $3 billion. It says it will expand this to $10 billion over time by using protocol fees to continue to purchase the asset.
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Source: https://decrypt.co/97901/luna-foundation-guard-terra-reserves-800m-gift-terraform