Do Kwon, the founder and CEO of Terraform Labs (TFL), which creates the Terra Luna (LUNA) and TerraUSD stablecoin (UST) blockchain ecosystems, said on Friday that TFL had donated 12 million LUNA ($1.1 billion as per the current market rate) to the Luna Foundation Guard (LFG).
LFG was founded in January with the goal of expanding the Terra ecosystem and ensuring the long-term viability of its stablecoins. “We will keep growing reserves until it becomes mathematically impossible for idiots to claim de-peg risk for UST,” Kwon said, adding that the assets will be burned to mint UST to grow the LFG’s reserves.
UST’s algorithm is sustained by swapping LUNA
UST is an algorithmic stablecoin with a notional 1:1 exchange rate with the US dollar, which is sustained in part by swapping LUNA tokens for/against it when its market price detracts from its peg. This implies that when you burn a dollar in UST, you get a dollar in LUNA, and vice versa.
As TheCoinRise reported, LFG-backed Terra recently secured $1 billion with support from DeFiance Capital, Republic Capital, GSR, Tribe Capital, among others. The Funding aims to form a Bitcoin-dominated UST reserve.
However, because of the enormous demand for UST on decentralized finance (DeFi) services like Curve Finance, unbalanced pools for stablecoin trading exist. As more crypto lovers exchange their USD Coin and Tether (USDT) for UST, the pool’s reserves will decrease, resulting in price volatility as supply falls behind demand. TFG had previously voted two days prior to burning the 4.2 million LUNA remaining in its treasury to protect UST’s peg.
As per TFG, it will swap the new LUNA to UST and then will sell the UST to the Curve Pool. Notably, swapping here means burning.
L F G 🚀🚀🚀
— LFG | Luna Foundation Guard (@LFG_org) March 9, 2022
“The proceeds will go back to LFG reserves to purchase BTC,” it adds.