Terra and the Luna Foundation Guard (LFG), a nonprofit organization dedicated to supporting the Terra network, announced today a $1 billion token sale of LUNA led by Three Arrows Capital, which sometimes-Ethereum critic Su Zhu leads, and Jump Crypto, this trading group made Solana cross-chain bridge Wormhole whole after a $320 million hack.
LFG intends to utilize the cash to establish a UST Forex Reserve. To understand why, you must first comprehend the Terra ecosystem, which contains the native LUNA token and fiat-based stablecoins.
TerraUSD (UST) is not backed by dollars but rather by LUNA. Every time someone mints UST, they must also burn LUNA. The entire tokenomic structure is intended to keep the price stable.
If the price of UST falls below $1, users can buy it at a discount and exchange it for $1 of LUNA. Because of the arbitrage play, the UST is burnt, assisting in restoring the stablecoin’s price to normal.
However, non-fiat stablecoins had already lost their peg when the algorithms failed to satisfy the short-term demands of traders.
“One of the common criticisms of algorithmic stablecoins is their reflexive nature during extreme volatility, where the arbitrage incentives to bring the peg back to parity can potentially deteriorate,” writes LFG in a press release.
“The UST Forex Reserve provides an additional avenue to maintain the stability of the peg in contractionary cycles that reduces the reflexivity of the system.”
According to LFG, the reserve, which is denominated in Bitcoin, diversifies the ecosystem away from Terra assets and acts as a “release valve for UST redemptions” into LUNA.
LFG claims it can use its Bitcoin reserves to calm the market in the event of a sell-off. It says that it intends to add more “major non-correlated assets” to the reserve in the future.
According to the organization, jump Crypto, Three Arrows, and other buyers in the $1 billion auctions will be subject to a four-year vesting period for the LUNA tokens, which means they can’t all be dumped on the open market right now. Further information on the vesting timeline has not yet been provided.