Thanks to a huge fundraiser, the foundation behind the Terra ecosystem (LUNA) is building trust in its stablecoin, UST. Let’s take a look at how this new bitcoin (BTC) reserve will work.
Luna Foundation Guard secures UST with a fundraiser
The Luna Foundation Guard (LFG), created to represent the Terra (LUNA) ecosystem, has raised $1 billion in funding. It has sold its LUNA token over the counter (OTC). This huge injection of liquidity will allow the foundation to build up a reserve of bitcoins (BTC) in order to make its algorithmic stablecoin, the UST, even more reliable.
The sale was led by Three Arrows Capital and Jump Crypto, it involved investment funds Republic Capital, GSR, Tribe Capital, DeFiance Capital and as well as anonymous investors.
The interest of BTC for UST
The choice of BTC by Luna Foundation Guard (LFG) during this fundraising is not trivial. Indeed, the entity explains that it wants to decouple from its ecosystem in order to further secure its flagship stablecoin:
“Reserve holdings can be used in cases where prolonged market selling deters buyers from restoring UST peg parity and deteriorates incentives for arbitrage in the open Terra Protocol market.”
To better understand these comments, let’s simply explain how the UST works. Its equivalence to the dollar is based on arbitrage, i.e., if someone realizes that his price is lower than a dollar, he will send USTs to the protocol and receive LUNAs of equal value as a reward. In this process LUNAs are generated and USTs are burned until the equilibrium of 1 UST = 1 USD is reached.
The reverse process is also possible. If the UST gains in value against the dollar, LUNAs are burned to generate UST, thus creating an inflation mechanism, making the UST lose value in order to bring it back to equilibrium against its underlying.
In the case of a prolonged strong bear market, the selling pressure of crypto-currencies could cause Terra’s UST to see its price rise. For example, one could sell ETH to buy UST, but this behavior has the indirect consequence of decoupling UST from the dollar. In an extreme case, the arbitrageurs might not be efficient enough to bring back the balance. This is where this emergency fund comes in, which will support the arbitrators by buying up the surplus UST in order to burn them.
The Luna ecosystem has exploded in the last year, getting a little stronger. This operation brings an additional layer of security to the decentralized stablecoin that has risen to 4th place in its category in a short time.
