Luna Foundation Guard is on the verge of buying large amounts of Bitcoin after raising $1 billion from LUNA’s OTC sale
Luna Foundation Guard (LFG) has raised $1 billion through the sale of LUNA OTC, the Terra blockchain’s native token.
The fundraiser, one of the largest in crypto history, was led by Jump Crypto and Three Arrows Capital, which included Republic Capital, GSR, Tribe Capital, DeFiance Capital, and other unnamed investors.
Luna Foundation Guard – a non-profit organization based in Singapore – was formed in January to help grow the Terra ecosystem.
The billion US dollars raised will be used to establish a foreign exchange reserve in Bitcoin for UST, Terra’s largest stablecoin.
UST is an algorithmic stablecoin that has gained popularity in the DeFi ecosystem. Tied to the price of the US dollar, it now has a market cap of more than $12 billion, according to The Block Research, a more than triple increase since last November.
According to Luna Foundation Guard , the reserve will effectively act as a “pressure relief valve” for the UST acquisition; is designed to ensure that the price of stablecoins is always pegged to the USD price during heavy sell-offs in the crypto market.
How do reserve funds work?
Unlike older stablecoins like those issued by Tether and Circle, algorithmic alternatives don’t use collateral to maintain their prices.
Instead, stablecoins like UST stay the course by relying on stimulus from the market. According to Terra’s website:
“If demand for Terra is high and supply is limited, the price of Terra will increase. If the demand for Terra is low and the supply is too high, the price of Terra will go down. The protocol ensures that supply and demand at Terra are always in balance, resulting in stable prices.”
Users can mine new Terra-based stablecoins – of which UST is the largest – by burning LUNA, and similarly they can burn UST to mint LUNA. They are encouraged to burn and mint in a way that ensures 1 dollar LUNA can always trade for 1 UST and vice versa.
However, the reserve fund will step in if a sell-off in crypto markets undermines this momentum.
“Reserve assets may be used in situations where prolonged market sell-offs prevent buyers from restoring UST parity and worsen arbitrage incentives in the open market.” of the Terra Protocol.
The initial reserve will be denominated in Bitcoin, which Luna Foundation Guard believes has little to do with the Terra ecosystem. They also plan to accumulate reserves with other uncorrelated assets over time, although which assets will be used remains unclear.
The basic premise is that this ensures that Terra’s arbitrage offerings remain intact even if demand for UST falls.
Kanav Kariya, President of Jump Crypto, said that the reserve mechanism is “similar to how many central banks maintain foreign exchange reserves to support monetary liabilities and protect against dynamic market conditions.”
LUNA, which was bought by Jump Crypto and other investors in a $1 billion sale, will be suspended for a period of 4 years, according to an announcement by LFG.
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