Terra’s LFG Will Spend $1.5 Billion to “Protect The UST Peg.”

After the stablecoin slid below its targeted $1 parity early Sunday, the Luna Foundation Guard (LFG) said Monday that it wants to lend $750 million in Bitcoin and 750 million UST to over-the-counter trading firms to “help protect the UST peg.”

The Luna Foundation Guard has responded to its task by defending the UST peg.

LFG, the non-profit tasked with supporting the Terra ecosystem, announced today in a twitter storm that it will lend professional market makers $750 million in Bitcoin and 750 million UST to restore the stablecoin to its intended parity with the US dollar.

The Singapore-based non-profit wrote early Monday, “Per the LFG’s mandate, the LFG will proactively defend the stability of the $UST peg & broader Terra economy.”

Early Sunday, Terra‘s flagship stablecoin fell below its targeted $1 parity, momentarily falling to $0.985, before recovering most of its losses. At publication time, UST was trading at about $0.995 on CoinGecko.

LFG will lend $1.5 billion in Bitcoin and UST to over-the-counter trading firms, who will trade the capital on both sides of the market to “help protect the UST peg” and collect additional Bitcoin as market circumstances stabilize, according to the announcement.

UST is an algorithmic stablecoin that works with Terra’s native currency, LUNA, through a dual token mechanism. Arbitrageurs can burn UST to generate $1 worth of LUNA tokens when it trades below peg, reducing supply and moving the stablecoin closer to its $1 objective.

Arbitrageurs can burn an equivalent dollar amount of LUNA to mint new UST when it trades over the peg, increasing supply and moving the stablecoin closer to its $1 parity.

Terraform Labs founded the foundation in January and began amassing Bitcoin to operate as an alternative backstop to the stablecoin, fearing that this process may lead to a so-called “death spiral” for LUNA, in which ever-more LUNA is burned to sustain UST.

The foundation hopes to accumulate a $10 billion Bitcoin reserve and develop an on-chain UST redeeming mechanism that will lessen the mechanism’s dependency on LUNA and so improve its stability.

Due to the lack of an on-chain redeeming mechanism against Bitcoin, Terra co-founder Do Kwon claimed the “LFG council decided to err on the side of caution” and put $1.5 billion in the hands of  skilled market makers who would have to manually arbitrage UST back to dollar parity.

Despite Kwon’s confidence in the move, LFG’s decision to sell $750 million in Bitcoin in an attempt to stabilize UST under already weak market conditions has many important industry leaders concerned. Derek Lim, the head of crypto insights at Bybit, commented on the decision, warning that it could lead to a Bitcoin sell-off, saying:

“Looks like LFG is going to loan $750 million worth of Bitcoin to Jump to sell to protect the peg and buy back at a lower, more attractive price with the total of $1.5 billion. This will add to the selling pressure. Bitcoin will likely go lower before it bounces back when short-sellers take profit.”

Though Terra experienced a meteoric rise from late 2021 to early 2022, there has been widespread anxiety about UST’s stability for more than a year. The decentralized stablecoin experienced a fall identical to the one it had yesterday, in May 2021. It got as low as $0.96 on one occasion.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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Patrick

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