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How Terra uses its Bitcoin reserves to maintain the stability of UST

How Terra uses its Bitcoin reserves to maintain the stability of UST

Terra, through the Luna Guard Foundation (LFG), purchased bitcoins to use as reserves for its UST stablecoin. It went well as planned and from the $10 billion Bitcoin founder Do Kwon said the foundation would buy for his reserves, more than $2.9 billion worth of BTC was added to the reserves.

However, the very nature of how these reserves are used to maintain UST parity remains unknown until now. Luna Foundation Guard recently revealed the steps it is taking with its BTC reserves to continue to maintain parity with the dollar.

Defend the stability of the UST

As the market took a hit, stablecoins were not far behind. These currencies, which are supposed to be pegged at 1:1 to the US dollar, have often been seen decoupled at various times. That is why these projects are taking various measures to continue maintaining these bets.

Terra’s strategy with the UST is simple; use the largest cryptocurrency on the market to boost the UST. This time, he plans to do it using multiple bitcoin and UST loans.

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First, Luna Foundation Guard will lend $750 million worth of bitcoins to various over-the-counter (OTC) trading companies. Next, it will also lend 750 million UST, or approximately $750 million, to accumulate bitcoin after the market returns to normal trends. Traders will then exchange the principal of the two loans on either side of the market. Both of these moves will help protect the stowage in the UST.

5/ Traders will trade capital on both sides of the market to help achieve both #1 and #2, possibly maintaining LFG (denominated in BTC) pool parity as market conditions gradually stabilize.

— LFG | Luna Foundation Guard (@LFG_org) May 9, 2022

The Luna Foundation Guard explained that “The LFG will proactively advocate for the stability of the $UST peg and the broader Terra economy, particularly in the face of volatile and uncertain macroeconomic conditions in legacy markets.”

LFG’s bitcoin value plummets

Like the rest of the market, the Luna Guard Foundation’s BTC reserves have also been affected by the recent drop in the price of bitcoin. The pioneering cryptocurrency has now dipped below the $34,000 level for the first time in three months.

This not only affected traders and investors in the space, but also affected BTC reserves for UST. Last week, NewsBTC reported that LFG’s BTC reserves had reached $2.93 billion with 80,393 coins. Today, that value is more than $200 million down from $2.7 billion.

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Stocks are also without USDT or USDC assets as of Monday morning. While its AVAX reserves also decreased in value with the stock market crash to currently stand at $99.40 million. UST is trading at $0.9968 according to CoinMarketCap and is now the 10th largest cryptocurrency by market cap.

Ionos Featured Image, Chart from TradingView.com

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