LFG to borrow $1.5 billion in BTC to bolster UST Peg

May 9, 2022 Stan

As a result of the market selloff seen on Bitcoin and other altcoins in the last two weeks, the Luna Foundation Guard (LFG) has decided to deploy $1.5 billion worth of capital to “help protect” Terra USD’s (UST) peg to the United States dollar.

The Singapore-based nonprofit LFG is part of the Terra ecosystem and is tasked with collateralizing the network’s algorithmic stablecoin UST to keep its USD peg intact while also managing the network’s reserves.

This move by the LFG comes after the UST lost its peg to the U.S. dollar. Over the weekend, the UST briefly lost its peg to the U.S. dollar, falling to $0.987 before climbing back to $1. At the same time, LUNA, the native token of the Terra blockchain, dropped 10%.

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While details are sparse at this stage, the LFG outlined on Twitter earlier today that it will first loan out $750 million worth of BTC to over-the-counter (OTC) trading firms to manage and trade the capital.
Following on from this, once the market has stabilized, the LFG will obtain a 750 million UST loan, most likely from Terraform Labs to re-balance its reserves.
The tweet reads, “As a result, the LFG Council has voted to execute the following: 1. Loan $750M worth of BTC to OTC trading firms to help protect the UST peg. 2. Loan 750M UST to accumulate BTC as market conditions normalize.”
The trend concluded by stating, “The traders will trade the capital on both sides of the market to help accomplish both #1 and #2, eventually maintaining parity of the LFG Reserve pool (denominated in BTC) as market conditions progressively stabilize.”
UST relies on another token, LUNA, to keep its price of a dollar via a set of on-chain mint and burn mechanisms and is one of the largest algorithmic stablecoin.
LUNA has suffered significantly over the past week as well, dropping a hefty 24.5% to sit at $62.15.
Part of the reason why UST briefly broke its peg was the large quantities of UST that were withdrawn from liquidity pools on decentralized exchange Curve, while $192 million of UST was dumped.

In a separate tweet thread, Do Kwon, the project’s founder, said that the move to loan out $750 million of bitcoin shouldn’t be seen as LFG trying to exit its BTC position but rather increasing the liquidity around the UST peg. Do Kwon explained that LFG will buy more BTC if UST expands from here, which he thinks is the more likely outcome.