Luna Foundation Guard, which secured $1 billion to establish a Bitcoin reserve for the UST stablecoin, has confirmed that the funding would be channeled towards creating a new reserve that may serve as a release valve for UST redemptions at the time of selloffs in cryptocurrency markets.
Last month, Jump Crypto and Three Arrows Capital had reportedly led the massive fundraising round, along with contributions from Republic Capital, GSR, Tribe Capital, DeFiance Capital and other prominent investors.
It does, however, remain unclear just how this stablecoin will maintain its peg to the USD. But its proponents have argued that it may be a better alternative to others in the market like USDC or USDT because these can be frozen (much like centralized assets or currencies).
1/5 We're happy to announce that we are leading the Luna Foundation Guard’s $1B token sale that establishes a $UST forex reserve denominated in #bitcoin
The UST Forex Reserve (Automated Market Reserve) backstops the UST peg in times of severe volatility
— Jump Crypto 🔥💃🏻 (@jump_) February 22, 2022
The Luna Foundation Guard (LFG) had also confirmed last month that they had acquired $1 billion via an over-the-counter (OTC) sale of LUNA, which is the native digital token of the Terra blockchain. It is also unclear whether this sale complied with applicable securities laws and regulations.
The fundraise, which is notably one of the biggest-ever in the digital assets space, will be supporting LFG, a non-profit entity with headquarters in Singapore. The fund was reportedly launched in January 2022 in order to further expand the fast-evolving Terra ecosystem.
Capital from the $1 billion sale will be channeled towards forming a Bitcoin-denominated forex reserve for UST, which is Terra’s largest stablecoin.
UST is described as an algorithmic stablecoin that has become quite widely-used within the decentralized finance (DeFi) sector. Pegged to the price of the USD, the stablecoin has a market cap of over $12 billion.
LFG revealed that the reserve established via the $1 billion fundraise will serve as a “release valve” for UST redemptions. It is specifically created to ensure that the stablecoin‘s price stays pegged to that of the US dollar during huge selloffs. But it is not quite clear just how this will be achieved and other similar initiatives have experienced challenges while trying to stabilize the price of their tokens.
Unlike many other stablecoins in the market (like USDT and USDC), algorithmic alternatives are not using any form of collateral to maintain their market price. These stablecoins (such as UST) maintain their peg by depending on certain market incentives.
As explained by the Terra team:
“When the demand for Terra is high and the supply is limited, the price of Terra increases. When the demand for Terra is low and the supply is too large, the price of Terra decreases. The protocol ensures the supply and demand of Terra is always balanced, leading to a stable price.”
Traders and investors are able to issue Terra-powered stablecoins (of which UST is the biggest) by simply burning LUNA tokens. Users may also burn UST to issue new LUNA. Traders are actually being incentivized by the protocol to burn and issue in a manner that ensures $1 in LUNA may be traded for 1 UST.
As noted in the update, the reserve was introduced to step in or intervene should selloffs in cryptocurrency markets remove those incentives.
At first, this reserve will only be denominated in BTC. LFG had explained last month that they think it is considerably less correlated to the Terra blockchain ecosystem. There are now plans to fill the reserve with various non-correlated assets in the future.
The main idea is that this approach should make sure that Terra’s arbitrage incentives stay intact (even if the overall demand for UST declines considerably).
As confirmed in the update, the LUNA acquired by Jump and various other investors in the $1 billion sale will now be locked up for more than four years as part of a vesting period.
Singapore’s Terraform Labs, established by Do Kwon and Daniel Shin, is the primary entity supporting the Terra blockchain.
The organization is supported by Pantera Capital, Coinbase Ventures, Galaxy Digital, Binance Labs, Dunamu, Huobi Capital and OKEx.
Terraform is facing a legal issue with the US Securities and Exchange Commission (SEC). The SEC is looking into whether Terra’s Mirror Protocol has violated applicable securities laws.
It’s worth noting that stablecoins have emerged as a viable alternative for sending payments, especially carrying out cross-border transactions. However, certain challenges remain such as transactions becoming quite slow or costing too much (like when sending USDT via the Ethereum blockchain). It’s still early days for stablecoin adoption, but this ecosystem has grown tremendously during the past few years, because of a growing awareness of the benefits of conducting transactions with blockchain-based currencies.