On Friday, Do Kwon, founder and CEO of Terraform Labs (TFL), which is developing the blockchain ecosystem made up of Terra Luna (LUNA) and the TerraUSD stablecoin (UST), announced that TFL had donated 12 million LUNA ($1, 1 billion at the time). of publication) to the Luna Foundation Guard (LFG). LFG launched in January to grow the Terra ecosystem and improve the sustainability of its stablecoins. Kwon noted that the funds, denominated in LUNA, will be burned to strike UST to grow the LFG’s reserves:
“We will continue to increase reserves until it becomes mathematically impossible for idiots to claim de-peg risks to UST.”
UST is an algorithmic stablecoin with a theoretical exchange rate of 1:1 to the US dollar, and is maintained in part by exchanging/for LUNA tokens when the market value deviates from the peg. Burning $1 in UST results in hitting $1 in LUNA and vice versa.
However, due to a high ask for UST on decentralized finance, or DeFi, platforms like Curve Finance, this results in unbalanced pools for trading stablecoins. For example, as more and more crypto enthusiasts exchange their USD Coin and Tether (USDT) for UST, the pool’s reserves will run out, creating price volatility as supply lags demand. Two days earlier, TFG had already voted to burn the 4.2 million LUNA remaining in the treasury to protect UST’s pin. According to to TFG:
“LFG will trade the . [new] LUNA to UST (swap=burn) and sell the UST to the Curve pool. The proceeds will go back to LFG reserves to buy BTC.”
Thanks to Terra’s flagship Anchor Protocol, UST is a very popular coin among crypto enthusiasts, promising up to 20% annual return on UST savings deposits. However, due to an imbalance between depositors and lenders paying interest, the Anchor Protocol’s reserve (for paying the promised yield) is still declining at the time of publication, although there has been a massive capital injection recently.
If there is still any confusion at this point, we will continue to increase reserves until it becomes mathematically impossible for idiots to claim a depeg risk for $UST $UST is mighty https://t.co/6xCDPWJUTX— Doe Kwon (@stablekwon) March 11, 2022