Terra UST decoupling? LFG deploys $1.5 billion emergency rescue

On May 9, according to CoinGecko data, LUNA continued to fall, once falling below $60 to a minimum of $59.94, and the current price is $61.75, a 5.1% drop in the last 24 hours, and a drop of nearly 50% from the all-time high. UST once fell to $0.98 and is now quoted at $0.997, down 0.3% in the last 24h.

SsOHcWfrgZlFPiQYlysEzF1EzEkOqNi4WuIZQg6w.pngAs we all know, Terra adopts a dual-token design, and UST works by maintaining a balance between two assets in the Terra ecosystem. If there are not enough incentives in the market to profit from arbitrage between UST and Luna, this could affect the currency’s peg to the US dollar. This also means that Terra cannot avoid the tragic and large-scale liquidation incidents that are prone to occur when the crypto market experiences violent fluctuations.

According to Terra Analytics data, on May 8, the circulating supply of LUNA increased by 957,201 pieces in a single day, reaching 91.357 million pieces, setting a new single-day record for the circulating supply of LUNA since April 8.

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In addition, the withdrawal of 150 million UST liquidity on Curve on May 8 also attracted the attention of the market. Affected by a series of news, “UST decoupling” began to ferment in the market.

In response, Luna Foundation Guard (LFG) tweeted that the market for crypto assets has been volatile over the past few days. Uncertain macro conditions in legacy asset classes over the past week also reflected market volatility. Relative to Terra, $UST experienced significant directional flows over the weekend, accompanied by similar swings in $LUNA and $BTC. While this flow has leveled off for now, it is prudent to prepare for potential future volatility. Under LFG’s mandate, LFG will actively defend the stability of the dollar-pegged $UST and the broader Terra economy, especially amid volatility in traditional markets and uncertain macro conditions.

Therefore, the LFG committee voted to implement the following measures: 1) Lend (Loan) BTC worth $750 million to the (Loan) OTC trading platform to secure the peg between UST and USD. 2) As the market returns to normalization, 750 million UST will be loaned out to accumulate BTC. Transactions on both sides will be carried out at any time according to market fluctuations, and as market conditions gradually stabilize, the ratio of BTC to UST in the LFG reserve pool will be kept in balance. Transfers from public LFG wallets will soon be reflected in the LFG reserve table, LFG said.

LFG is a new decentralized organization developed to support the Luna ecosystem, and one of its biggest functions will be to build a “foreign exchange reserve” to help the Luna ecosystem’s companion stablecoin, UST, maintain its peg. LFG is funded by donations from Terra and financing in the form of the issuance of LUNA. As of May 9, 2022, LFG has a total of nearly $2.9 billion in assets, including 93% of BTC, 3.6% of LUNA and 3.4% of AVAX.

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Terra founder Do Kwon responded by saying that the LFG committee just voted to deploy $1.5 billion in funding ($750 million in BTC, $750 million in UST) to ease market concerns about UST pegs.

First, LFG did not attempt to exit its Bitcoin position, Do Kwon emphasized. The goal is to keep this capital in the hands of professional market makers to: 1) buy UST if price < peg 2) buy BTC if price >= peg, thereby significantly increasing liquidity around UST. While there is no apparent directionality in buying or selling UST right now, we believe there is value in being prepared to deploy capital in the current market. As the market recovers, we plan to take out loans to accumulate BTC, thereby increasing our total reserve size. We had hoped that the on-chain bitcoin reserve system would come online when Terra’s economy contracted, eliminating the need for LFG to intervene in regulation as appropriate.

Do Kwon said this will be an important opportunity for Terra and the wider crypto community to gather empirical data on how LFG operates and fits into the Terra ecosystem. For the next few days, focus not on whether LFG chooses to deploy the reserve, but on how.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/terra-ust-decoupling-lfg-deploys-1-5-billion-emergency-rescue/
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