a bitcoin reserve to support the stablecoin protocol

Microstrategy is not the only company that wants to make Bitcoin its main reserve asset. The company could well find a rather unexpected new competitor, Luna Foundation Guard (LFG), the company behind the stablecoin Terra protocol.

Source: Adobe

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 their tokens inside a four-year vesting period. Moreover, recently, the founder of Terra, Make Kwonoutlined a program to buy Bitcoin (BTC) worth $ 10 billion, which will add to the project’s stablecoin reserves.

Why did Terra choose to use Bitcoin as a reserve asset? Unlike Tether (USDT) and other mostly centralized stack coins, UST is not supported by the dollar and its binding is maintained by allowing users to change UST and LUNA reserves.

“Building a reserve of BTC is a smart move and may result in smaller fluctuations in UST during future attacks of market volatility,” he explained. Matthew DibbChief Operating Officer and co-founder of Stack funds. “Ideally, the LFG would take steps to maintain these on-chain reserves at 100% for reasons of transparency rather than through centralized means.”

DeFi (decentralized finance) researcher Westie said that building these reserves is extremely important for Terra’s stability. Greater stability may lead to a more robust demand for UST, which will reduce the supply of LUNA. In fact, the questions about LUNA are closely related to UST’s: To create 1 UST, one must deduct $ 1 LUNA out of circulation.

But while the mechanism behind the protocol is beneficial during recovery, it can prove detrimental during a market crash when it is less attractive to hit both tokens to maintain parity intact.

A bitcoin reserve should mitigate this risk to some degree, as the market’s leading cryptocurrency is less correlated with 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 exchange reserves to back monetary obligations 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 original 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 use and more attractive to hold . “.

According to data tracking website CoinGecko, the market value of UST has grown from around $ 9 billion to over $ 34 billion in a year, making this dollar-linked digital asset the fourth largest stack coin in the world. In addition, LUNA has almost doubled in the last 12 months.

Market value of LUNA, source: Coingecko

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