The stablecoin, Terra USD, recently lost its peg albeit briefly on May 7. There are indications that this could be a sign of instability of the stablecoin and that more risks lie ahead for its users.
Did Luna really buy BTC at $47k just to sell it at $34k to defend the peg? This is one of several similar questions that people are asking within the crypto community.
Terra USD with ticker, UST, which is the biggest algorithmic stablecoin is not backed by any asset like other popular stablecoins such as USDT. However, Luna Foundation Guard, the entity behind the stablecoin, last March, acquired $1.5 billion worth of Bitcoin in forex reserves to shore up the support for the Terra USD.
A Boost To An All-Time-High Value
The publicity also gave LUNA, the governance token of the Terra ecosystem a boost to its all-time-high value of $116. The move was described by the co-founder of Terraform Labs, Do Kwon, as moving the stablecoin towards the Bitcoin standard. He maintained that it is a winning strategy for the stablecoin, UST.
There were indications that the buying pressure from the company contributed to a steady rise in the price of Bitcoin in early March as Kwon revealed that the company bought some $100 million worth of the asset daily within that period. Last December, the foundation bought BTC for the first time. Its first $1 million addition of the digital assets was when Bitcoin was valued around $47,000. The coin ended the week of the first buy at $48,000.
Top 10 Cryptocurrency By Market Capitalization
The acquisition also ensured that the stablecoin moved to the top 10 according to market capitalization. Luna Foundation Guard further stated that it would increase its Bitcoin holdings to $10 billion by September. This would be in addition to other altcoins in its possession such as its stash of over $100 million in AVAX.
There are speculations on the recent de-pegging of the UST and the role that the proposed $10 billion BTC forex reserve is meant to play in the stabilization of the UST. Some market watchers say that the foundation may simply be selling the bitcoins to defend the peg of UST to the United States dollar.
In its Mission and Vision, the Luna Foundation Guard stated that:
“the value of Terra’s family of stablecoins is maintained through a system of arbitrage incentives, open market operations, and dynamic protocol levers that maintain robust peg stability and scalability of its supply without the centralized control or capital-inefficient designs of incumbents”
It added that this is accomplished through its protocol design which comprises native staking of its tokens, its governance and reserve asset, LUNA.
The Singapore-based foundation stated that this “permissionless arbitrage incentives and counter-cyclical monetary policy” mechanism ensures that the UST peg is maintained in periods of contraction and expansion, thereby maintaining the stability of its stablecoin.
Plan To Dump BTC To Stabilize UST
Haven’t sold bitcoin yet – the txn just went out. It’s a loan to a market maker – if UST imbalance happens we will use BTC to rebalance, and if demand is surplus we will buy BTC
We plan to eventually redeem this entire clip in bitcoin, let’s see
— Do Kwon 🌕 (@stablekwon) May 9, 2022
While reacting to the speculation that the foundation is actually selling BTC to redeem its floundering stablecoin from unpegging, Do Kwon wrote on a Twitter post,
“Haven’t sold bitcoin yet – the txn just went out. It’s a loan to a market maker – if UST imbalance happens we will use BTC to rebalance, and if demand is surplus we will buy BTC
We plan to eventually redeem this entire clip in bitcoin, let’s see”
In his clarification, he added that the BTC will be used in trading to “signal peg strength to the market as capitulation sentiment has set in”
In another statement, Kwon said that they’re offloading some of their BTC stash to stabilize UST. He added eerily that if UST fails, that it equates the failure of crypto.
Reacting to the comment, a market analyst @ThinkingBitmex wrote:
“I guess this is what happens when you entrust a degenerate with a 1B+ treasury, who somehow buys the top and is now about to offload all that BTC to the same people who sold it to him 50% higher”
In their assessment of the scenario, @swanky_moves wrote:
“So they’re loaning 750milli worth of btc back to the market huh, not even a month after and already capitulating their top buys sheeeeeeeeeeeeeshhh”