After financing $1.5 billion in BTC and UST, Do Kwon, the outspoken creator of Terraform Labs, announced that the Luna Foundation Guard (LFG), a non-profit entity responsible with creating reserves for Terra’s algorithmic stablecoin UST, “does not intend to liquidate its bitcoin holdings.”
The loan was intended for a professional market maker to spend BTC to keep UST tied to the US dollar, according to a Twitter thread Do Kwon published after the LFG Council “decided to deploy $1.5 billion in cash” to “allay market fears regarding UST.”
Do Kwon remarked that while “buys and sales of UST are not significantly directional at this time,” the Luna Foundation Guard considered it was “useful to have cash available for deployment in the current market?” He stated that after the market rebounds, the organization hopes to “have the loan returned to us in BTC, thus growing our total reserves.”
The Luna Foundation Guard
The Luna Foundation Guard has been building a Bitcoin reserve with the intention of amassing a $10 billion Bitcoin reserve to sustain the UST stable coin. To accomplish this, the stable coin may set aside a portion of its UST issuance proceeds to purchase more BTC.
He went on to say that the LFG anticipated that their on-chain BTC reserve mechanism would be operational “by the time the Terran economy shrank, therefore eliminating the necessity for LFG discretionary action.” He sees the development as a “critical opportunity for Terra and the broader crypto community to gain empirical knowledge on how LFG performs and fits inside the Terra ecosystem.”
UST’s value fell below $1
Do Kwon’s thread appeared immediately after the UST’s value fell below $1, most likely as a result of a series of large withdrawals on Curve and the Anchor Protocol, a lending market that pays high-interest rates to UST depositors. The entire amount of these withdrawals from Anchor, according to the records, topped $2 billion.
Terra is a Proof of Stake (PoS) blockchain that uses LUNA to keep the stable coin linked to the US dollar. Users can always exchange $1 of LUNA for $1 of UST and vice versa.
If the price of UST falls below one dollar, it can be exchanged into LUNA and sold for one dollar, making it appealing to arbitrage traders. Holders of LUNA tokens can profit if the price rises above $1 by exchanging their tokens for 1 UST. LUNA is generated and deleted to support these operations.