Terra’s LFG to Deploy $1.5B to “Protect the UST Peg”

Key to take

  • The Luna Foundation Guard will lend $ 750 million in Bitcoin and $ 750 million to market makers to help stabilize UST.
  • It comes after UST lost its listing early Sunday due to intense market conditions.
  • Several key industry figures have warned that the move could lead to a sale of Bitcoin.

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The Luna Foundation guard said Monday it plans to lend $ 750 million in Bitcoin and $ 750 million to over-the-counter trading companies to “help protect the UST peg” after the stable currency fell below its expected parity of $ 1 early Sunday.

LFG will deploy $ 1.5 million to save UST Peg

Under his tenure, the Luna Foundation Guard took action to defend the UST peg.

LFG, the nonprofit organization responsible for supporting the Earth ecosystem, revealed in a storm of tweets today it would lend $ 750 million in Bitcoin and US $ 750 million to professional market makers to bring the stablecoin back to its expected parity with the US dollar.

“Under the LFG’s mandate, the LFG will proactively advocate for the stability of the wider US $TT economy,” the Singapore-based nonprofit non-profit organization wrote on Monday. The stable currency of Earth slip from its expected parity of $ 1 early Sunday, falling briefly to $ 0.985 before recovering most of its losses. According to CoinGecko data, UST is trading at about $ 0.995 at the time of publication.

According to the announcement, LFG will lend $ 1.5 billion in Bitcoin and UST to over-the-counter trading firms that will trade capital on both sides of the market to “help protect the UST peg” and accumulate more Bitcoin as conditions normalize of the market.

UST is a algorithmic stablecoin which uses a dual token mechanism with the native Terra LUNA token. When UST trades below the peg, arbitrage can burn it to coin LUNA tokens worth $ 1, thus lowering the bid and bringing stablecoin closer to its $ 1 target. When trading above the peg, arbitrage can burn a equivalent amount in LUNA dollars to coin a new UST, thus increasing supply and bringing stablecoin closer to its $ 1 parity.

Due to fears that this mechanism could lead to a so-called “death spiral” for LUNA, where more and more LUNA is burning to stabilize UST, Terraform Labs established the foundation in January and began accumulating Bitcoin to act as an alternative backing to stablecoin. The foundation aims to accumulate a $ 10 billion Bitcoin reserve and create a chain redemption mechanism against UST that will reduce the mechanism’s reliance on LUNA and thus strengthen its stabilization capacity.

However, due to the fact that the chain rescue mechanism against Bitcoin is not yet active, the co-founder of Terra Do Kwon said that the “LFG board decided to err on the side of caution” and deploy a $ 1.5 billion capital into the hands of professional market makers who would have to arbitrate UST to return to dollar parity manually. While Kwon has shown confidence in the move, LFG’s decision to sell Bitcoin worth $ 750 million in an attempt to stabilize UST amid already unstable market conditions has put many key industry figures at risk. Commenting on the move, Bybit’s chief information officer Derek Lim warned that the move could lead to a sale of Bitcoin, saying:

“It looks like LFG will lend $ 750 million in Bitcoin to Jump to sell to protect the peg and buy back at a lower and more attractive price with a total of $ 1.5 billion. This will increase selling pressure. Bitcoin will likely go down before that recovers when short sellers make a profit.

Han Kao of Sanctor Capital added that the market is already “seeing a direct correlation and a negative impact on the price of Bitcoin” due to UST’s stability problems. “When UST dropped 50 basis points yesterday, Bitcoin was down 5%,” he said, noting one wallet who had used $ 200 million to buy UST. That portfolio, Kao suggested, probably belongs to Jump Capital, the same market-creation company that rescued Wormhole when it was hacked for $ 322 million in February. Jump chairman Kanav Kariyathat is on the LFG board.

Although Terra has enjoyed a parabolic rally from late 2021 to 2022, concerns about UST’s stability have been present throughout the industry for more than a year. The decentralized stablecoin suffered an accident similar to the one it experienced yesterday in May 2021. On that occasion, it dropped to $ 0.96.

Disclosure: At the time of writing, the author of this piece had ETH and several other cryptocurrencies.

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