MicroStrategy is not the only company that wants to make Bitcoin its main reserve asset. The firm could well find a rather unexpected new competitor, Luna Foundation Guard (LFG), the company behind the stablecoin Terra protocol.
LFG had implemented this strategy a few months ago and had raised $1 billion through a private token sale to build a bitcoin reserve. Buyers will lock up their tokens for a four-year vesting period. Moreover, recently, the founder of Terra, Do Kwonoutlined a program to buy Bitcoin (BTC) worth $10 billion, which will add to the project’s stablecoin reserves.
Why Terra chose to use Bitcoin as a reserve asset? Unlike Tether (USDT) and other mostly centralized stablecoins, UST is not backed by the dollar and its peg is maintained by allowing users to change UST and LUNA reserves.
“Building up a reserve of BTC is a smart move and may result in less fluctuation in UST during future bouts of market volatility,” explained Matthew DibbChief Operating Officer and Co-Founder of Stack Funds. “Ideally, LFG would take steps to maintain these on-chain reserves at 100% for transparency reasons rather than through centralized means.”
DeFi (decentralized finance) researcher Westie said that building these reserves is extremely important for the stability of Terra. Greater stability could lead to more robust demand for UST, which would reduce the supply of LUNA. Indeed, the issues of LUNA are closely linked to those of the UST: to mint 1 UST, one must withdraw from circulation 1 dollar of LUNA.
However, while the mechanism behind the protocol is beneficial during upswings, it can prove detrimental during a market crash, when it is less attractive to hit either token to sustain parity intact.
A bitcoin reserve should mitigate this risk to some extent, as the market’s premier cryptocurrency is less correlated to the Terra ecosystem and arbitrage trades can be performed to trade UST for bitcoin and support parity. of USTs. LFG has also stated that in the future, it may introduce other major uncorrelated assets into the reserve.
Kanav KariyaChairman of Jump Crypto, said this strategy can be used to protect UST parity under stressful conditions, a process similar to how many central banks hold foreign currency reserves to back monetary liabilities and protect against dynamic market conditions.
As for the purchase of 10 billion bitcoins, specific details are few. In any case, Do Kwon has indicated on Twitter that Terra will not sell its native LUNA asset to build up its reserves. He also claimed that Terra’s choice “will usher in a new monetary era of the Bitcoin standard”, thanks to “P2P (peer-to-peer, pair-to-peer) electronic money that is easier to spend and more attractive to hold. “.
According to data-tracking website CoinGecko, the market capitalization of UST has grown from around $9 billion to over $34 billion in a year, making this dollar-linked digital asset the fourth-largest. stablecoin in the world. Furthermore, LUNA has increased almost sixfold over the past 12 months.
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