Do Kwon, the founder of Terra ($LUNA), recently Bitcoin stated that $UST, the Terra Protocol’s main decentralized stablecoin, will be the first internet-native currency to adopt the Bitcoin standard as part of its monetary policy.
Do Kwon’s comments came during a Bloomberg interview about the Terra protocol’s monetary policy and the rise of the UST stablecoin, which was fueled in part by the Anchor Protocol’s roughly 20% interest rate on cryptocurrency deposits.
Bloomberg explained in its report that a near-20 percent interest rate is no longer possible in traditional banks, while.
Does Kwon argue that the high-interest rate Bitcoin reflects the number of profits that decentralized finance (DeFi) can currently provide investors? According to Do Kwon:
“It’s actually not unnatural for currencies of growing economies to offer higher interest rates than those of mature, stable economies. I think that’s going to set the thesis for what the Terra ecosystem is going to look like and its monetary policy.”
More About Do Won’s Statement
While some DeFi ventures have offered greater rates in the past, it hasn’t happened on the magnitude of Anchor and UST’s $15 billion market worth.
Other programs have interest rates as high as 5%, with blue-chip DeFi money market Compound giving nearly 3% on DAI deposits.
Bloomberg notes that Anchor’s high rates are important in driving demand for UST, so a sudden decline might put the cryptocurrency’s peg to the US dollar to the test.
In addition to staking rewards, Anchor pays deposits with money gained from lending UST to borrowers.
However, Anchor’s community recently observed that the protocol was burning yield reserves quicker than intended, necessitating the injection of $450 million to keep rates from falling. Analysts predict rates to fall if they do.
Do Kwon, on the other hand, is optimistic about Terra’s and the LUNA token’s future, so much so that he recently placed two $11 million wagers on whether the LUNA token’s price would grow above $88 next year.
Anchor’s returns are “created out of thin air,” according to Sensei Algod, who took the other side of the bet and termed UST and Terra a Ponzi scheme.
To Do Kwon, if UST is to keep growing, so is the price of LUNA, although he eventually sees Anchor’s returns drop to 7.5% to 12% as the DeFi market matures.
The LUNA community, as CryptoGlobe has been reporting, recently launched an effort to improve UST’s peg to the U.S. dollar, specifically with BTC reserves.
Conclusion
Terra is a Proof of Stake (PoS) blockchain that uses LUNA to maintain the algorithmic stablecoin’s dollar peg.
While UST has yet to be backed by any assets in reserve, its value is determined by the minting and burning of LUNA, as users can always exchange $1 worth of LUNA for 1 UST.
UST can be swapped for LUNA and sold for $1 if the price falls below $1, making it appealing to arbitrage traders. If the price rises above $1, LUNA token holders can profit by selling their tokens for 1 UST.
To make these transactions possible, LUNA is minted and burnt.
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