In the ecosystem of Terra (LUNA), the stablecoin UST is an important tool. To better secure TerraUSD, a new foundation has been established. Investors have deposited $1 billion there.
With the growth of the crypto industry in the DeFi division, the demand for stablecoins as a substitute for fiat has once again increased significantly. The three most important stablecoins by market capitalization are currently called Tether (USDT), USD Coin (USDC) and Binance USD (BUSD). These all have in common that they are centrally organized and backed by classic US dollars or, for example, conservative fiat bonds. Behind the fourth largest stablecoin TerraUSD (UST), however, is a different concept. TerraUSD, like other stablecoins under Terra (LUNA), is hedged by automated algorithms. While this solution is quite elegant and has helped make the Terra ecosystem the number two DeFi. But in worst-case scenarios, the stability of Terra and UST could be at risk. To prevent this, Terra has now made a big move publicly via Twitter.
Already at the end of January, a foundation called Luna Foundation Guard (LFG) was established rather quietly. In the blog post on the launch of the Singapore-based LFG, the main goal stated is to become a pillar of support for TerraUSD. That goal is now taking shape, as LFG has raised $1 billion in capital from crypto funds. This money will now be invested in Bitcoin (BTC) to form a decentralized “forex reserve” for UST. The idea behind this: If the markets for Terra and UST become extremely dynamic, selling pressure could cause the two tokens to buckle. This stems from the automaticity that TerraUSD is ultimately hedged by Terra (LUNA). With the additional reserve in Bitcoin, the system can now step in and counteract to hedge TerraUSD in case of emergency or unusually high turnover with BTC. How this will work in detail is to be announced in the coming weeks.
Conclusion: TerraUSD becomes more secure – the LUNA ecosystem also benefits from this.
The news about the increased hedging of UST has sent Terra’s price curve up by around 13 percent, making LUNA the day’s winner among the 20 most capitalized cryptocurrencies. Experts and investors assess the – admittedly not entirely uncomplicated – cleverly supplemented concept to TerraUSD positively and expect impulses also on DeFi under Terra. In fact, the 1 billion US dollars here are no mean feat. They were achieved through direct sales of LUNA and the major investors have committed not to draw on these reserves for at least four years. That makes it one of the largest direct sales of cryptocurrencies ever. Meanwhile, LFG is already said to want to create more reserves decoupled from LUNA in the future.