Despite the sharp retracement in the broader crypto market (including the BTC market), the LUNA foundation plans to use $1.5B in BTC to ensure that Terra’s UST remains pegged to the USD.
Apart from managing the network’s reserves, LFG is also responsible for ensuring that the network’s stablecoin token remains pegged at 1:1 to the fiat USD.
The LFG’s Plan
While the LFG is yet to release full details about this plan, it revealed via Twitter today that it would loan otc trading platforms $760M to trade the cryptocurrency market.
Then, when the market becomes stable, LFG will request a 750M UST loan from Terraform labs to balance its reserves. The LFG remarked that this decision was taken following the council’s meeting. It discussed the effect of the enormous volatility that currently pervades the BTC, UST, and Terra markets since the beginning of this month.
Terraform Labs CEO, Do Kwon, offered an additional explanation of the move by the LFG.
Known tweeted that “LFG isn’t selling its BTC holdings. It’s only ‘using’ the coins for a specific period to improve the UST’s value within this short period as the LFG will likely increase its BTC holdings over the long-term.”
Kwon added that “we believe it is important for us to have cash readily available to be deployed in the market since UST transactions don’t have a specified market bias right now. Once the market recovers, the loan will be paid back in BTC, which will increase the value of our BTC reserves.”
The Necessary Alternative Plan
92% of LFG’s $2.92b reserves by backed by BTC. Hence, the reduction in the value of BTC recently makes it essential for the firm to take necessary steps that ensure that its stablecoin token remains pegged to the USD. BTC has lost 12.8% of its value in the last week, while UST’s peg to the USD has reduced marginally to $0.99.
Terra’s native token, LUNA, declined by nearly 25% in the last seven days. LUNA’s burning and minting process contributes in no small way to ensuring that the UST remains pegged to the USD.
Terra Community Members Aren’t Happy With The LFG’s Decision
Despite the explanations by the LFG and Terraform Labs CEO, many members of the Terra ecosystem remain unconvinced. Some argue that the LFG shouldn’t have panicked into making this move as the selling pressure isn’t that intense for the foundation to have ‘loaned out’ 50% of the stablecoin’s BTC holdings.
Others allege that Kwon didn’t carry members along while making the decision, knowing fully well how such a decision would affect UST holders. However, Kwon responded to the allegation against him, saying, “it was important to make such a decision fast, and holders need not worry as they were fully considered when the LFG was making the decision.