Will the Luna Foundation buy $10 billion in Bitcoin in exchange for real money?

On March 28, the Luna Foundation Guard (LFG) recently purchased 2,830 bitcoins with a high profile.

Since March 22, the Luna Foundation has frequently increased its holdings, with an average of about 3,000 bitcoins being credited in two days. As of April 6, 35,767.98 bitcoins have been acquired by the Luna Foundation.

And according to Do Kwon, the Luna Foundation’s holdings will continue. “Besides Satoshi Nakamoto, we will become the largest single holder of BTC in the world,” Do Kwon said.

So, what is the underlying reason for the Luna Foundation’s massive purchase of Bitcoin? What impact will this move have? To answer these questions, we must start with Terra Protocol.

LUNA is an invisible collateral for stablecoins such as UST

Terra Protocol, a public chain platform based on the stablecoin protocol, was established in January 2018. A few months later, it received 32 million US dollars of investment from Binance, Huobi, FBG Capital, etc.

In the next few years, the team behind Terraform Labs successively launched the mobile payment platform Chai, the synthetic asset protocol Mirror Protocol, and the lending protocol Anchor. Although Terra’s ecology continues to grow, it has also been criticized. For example, news such as “The Anchor Protocol’s reserves tend to be depleted due to lack of borrowing needs” have diagnosed Terra’s illness by citing data.

On the whole, understanding Terra can be viewed from two aspects, one is the stable currency, and the other is the public chain ecology. Here we focus on stablecoins.

Terra provides minting and exchange of a variety of stablecoins, including the Thai baht stablecoin THT, the Korean won stablecoin KRT, and the U.S. dollar stablecoin UST. Among them, UST is regarded as Terra’s own native stablecoin, which is an algorithmic stablecoin. Terra uses a dual-token mechanism to keep UST pegged to the US dollar. Behind the peg of 1 US dollar is LUNA, another native token of the Terra ecosystem.

UST needs to destroy LUNA to mint. The larger the UST issuance scale, the smaller the total supply of LUNA. Conversely, when UST is reversely redeemed as LUNA, the supply of LUNA will increase.

Essentially, LUNA is an invisible collateral for stablecoins such as UST. As the ecological volume of Terra increases, the risk of single collateral/endorsement naturally increases. This is also one of the reasons why many articles or opinions criticize Terra’s ecological death spiral.

In this regard, Do Kwon thought of a way to endorse it with Bitcoin, which is generally considered to be the most valuable consensus in the blockchain world. How to do it? Set up a relatively flexible special fund account such as a foundation to deal with various problems.

So, in January of this year, the Luna Foundation was born and started a mode of buying a large number of Bitcoins.

The Luna Foundation’s long-term target reserves of $10 billion

Where does the funding for the Luna Foundation come from? The data shows that, on the one hand, it comes from Terra’s official LUNA grant, and on the other hand, it comes from external financing. For example, Jump Crypto, Three Arrows Capital, Republic Capital, GSR, etc. have invested in it.

Do Kwon also said on social media that the Luna Foundation has raised $1 billion through LUNA’s OTC sale and another $1.2 billion by selling UST in exchange for USDT, and hopes to increase UST’s Bitcoin reserves in the near term To $3 billion, the long-term goal is $10 billion.

Do Kwon also said that the foundation will create a bridge to convert billions of dollars worth of dollars into bitcoin into Terra as a reserve for the stablecoin protocol.

According to Bloomberg reporter Muyao Shen, as of March 29, the Luna Foundation had purchased more than $1 billion worth of Bitcoin, held about $420 million in LUNA, and $2.2 billion in USDT and USDC.

Regarding the purchase of Bitcoin by the Luna Foundation, Adel, a researcher at a financial technology company, told the Blockchain Daily reporter that using Bitcoin as the reserve of UST is a very clever mechanism. Reserve assets are more diversified, more stable, and less prone to de-anchoring.

There are also views that UST’s goal is to become the world’s largest decentralized stablecoin, which requires UST to maintain a neutral asset identity. In this way, the inclusion of Bitcoin in the UST endorsement system has significance beyond simple economics.

But many netizens are skeptical.

“LUNA is about to be thrown away, and people have turned into BTC Holders through the cottage, how about you?” “You bought LUNA, Terra sold LUNA for the pie, why don’t you buy the pie yourself?” Some netizens even said : “The Luna Foundation is exchanging its own broken copper (LUNA) for real money (BTC) in the hands of other traders.”

Are you bullish on Bitcoin?

Supporters and opponents have their own opinions, and it is difficult to decide who is right and who is right. In an interview with the crypto podcast “Unchained Podcast”, Do Kwon gave his thoughts.

“The LUNA-UST system is sufficient and is becoming more and more robust. But in extreme cases, LUNA will face the risk of a death spiral. In this way, Terra builds its own foreign exchange savings as a natural choice.” He admitted frankly.

At the same time, he also said that the role of BTC is to make UST a more neutral asset to facilitate the expansion of UST to other ecosystems.

As the supporters said, if the reserve assets are more diversified and stable, it will be conducive to ecological development, which is a good thing for Terra ecology. The new UST endorsement mechanism is also here to solve the problem. If the problem can be solved well, everyone will be happy. But for opponents, they believe that Terra is a scam, even if there is a Bitcoin reserve, it is still a scam.

As for how the new UST endorsement mechanism works, Do Kwon explained: “The new mechanism can be viewed as a fragmented foreign exchange deposit. Before that, minting 1 UST required destroying LUNA worth 1 USD. Now the difference is, When 1 UST is minted, a part of the LUNA will be destroyed, and the remaining part will be used to purchase non-ecological assets (currently BTC) to ensure decentralized foreign exchange savings.”

“This ratio is not fixed. At present, it will depend on the real-time price of UST against BTC, that is, the volatility of BTC, and the specific ratio will be determined by the DAO.” Do Kwon further explained.

This is more like a UST bitcoin gamble, and it is clear that the whole time is bullish on bitcoin. No matter how the outside world looks at it, Do Kwon is still sticking to his bitcoin purchase plan, with a short-term goal of $3 billion, a long-term goal of $10 billion, and the ultimate goal of Satoshi Nakamoto second.

Although Do Kwon expressed determination, it did not seem to reassure opponents. In the minds of opponents, LUNA is like something of little value generated out of thin air, but it has been exchanged for Bitcoin, the most valuable consensus in the industry. The LUNA on the left end of the scale and the Bitcoin on the right end are difficult to match, and the chips are not enough. How can they make up? Perhaps this is a philosophical question that will never have a unified answer.

future uncertainty

Just imagine, if the Luna Foundation finally uses $10 billion in Bitcoin as a reserve for the stablecoin protocol, will it really solve the risk problem? But in fact, it’s not.

On March 12, 2020, the price of Bitcoin fell sharply, from the opening price of more than $7,900 to the lowest of more than $4,100, with a maximum drop of 48%. The market is filled with a lot of panic, and the currency circle is full of grief. Many people are trapped in search of an opportunity to get off the bus and cannot.

On the evening of May 19, 2021, Bitcoin once fell below the $30,000 mark and dropped to $29,000, a drop of as much as 34%. This day was dubbed the “519 bloodbath” by the currency circle.

Obviously, buying more bitcoins doesn’t make the risk zero.

Not to mention, Terra also faces the potential risk of a regulatory crackdown. For example, Terra received calls from regulators in other countries as early as last year.

In March 2021, the Bank of Thailand announced that it would treat any activity involving the Thai baht digital stablecoin THT as illegal because “the creation, issuance, use or circulation of any material or token as currency is a violation of Article 9 of the Currency Act of 1958. .”

All in all, under the support of multiple factors such as UST de-anchoring, currency price instability, and regulatory crackdowns, there are many uncertainties and possibilities for Terra’s future development.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/will-the-luna-foundation-buy-10-billion-in-bitcoin-in-exchange-for-real-money/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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