Amid the sharp pullback of Bitcoin (BTC) and the broader cryptocurrency market this week, the Luna Foundation Guard (LFG) is willing to deploy $1.5 billion worth of capital to “help protect” Terra USD’s (UST) peg to the US dollar.
The Singapore-based non-profit LFG is part of the Terra ecosystem and is tasked with ensuring the network’s algorithmic currency, UST, to keep its peg to the dollar intact, while also managing the reserves of network.
Although details are scarce at the moment, LFG has noted on Twitter today that it will first lend $750 million worth of BTC to over-the-counter trading firms to manage and trade the capital.
Next, once the market has stabilized, the LFG will obtain a loan of 750 million UST, probably from Terraform Labs, to rebalance its reserves.
The LFG noted that the council voted to execute the plan after observing “significant” market volatility across BTC, UST, and Terra (LUNA) in recent days.
4/ As a result, the LFG Council has voted to execute the following:
– Loan $750M worth of BTC to OTC trading firms to help protect the UST peg.
– Loan 750M UST to accumulate BTC as market conditions normalize.
— LFG | Luna Foundation Guard (@LFG_org) May 9, 2022
Providing further explanation on the move, Terraform Labs founder Do Kwon emphasized on Twitter that “LFG is not trying to get out of its Bitcoin position” and is ultimately deploying short-term capital to strengthen UST, and will increase its BTC holdings in the long-term:
“Although UST buying and selling is not significantly directional now, we felt it was valuable to have capital ready to be deployed in today’s market. As markets recover, we plan to have the loan repaid to us in BTC, increasing the size of our total reserves.
1/ The LFG Council just voted to deploy 1.5B in capital (0.75B in BTC, 0.75B in UST) to allay market concerns around UST. Some more context on why and how: https://t.co/TfaAPkzgUJ
— Do Kwon (@stablekwon) May 9, 2022
Given that the LFG’s $2.91 billion reserves are 91% backed primarily by BTC, i.e. $2.7 billion at press time, the asset price decline is forcing the entity to readjust its balance to maintain the peg of UST to the US dollar. At time of writing, BTC is down 12.7% in the last seven days, standing at around $33,600, while UST is slightly off par at $0.99.
Terra’s native asset, MOON, which also plays a role in maintaining UST parity through its burning and minting mechanism, has also suffered significantly over the past week, dropping a hefty 24.5% to $62.15.
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