LUNA, the native cryptocurrency of the Terra ecosystem has surged by 10% in the last 24-hours with its price shooting past $55 once again. This comes as the Luna Foundation Guard (LFG) raises $1 billion through an over-the-counter sale of LUNA.
Jump Crypto and Three Arrows Capital were leading the fundraise along with participation from other players such as GSR, DeFiance Capital, Republic Capital, Tribe Capital, and others.
The Luna Foundation Guard is a non-profit setup earlier this year in January to push the growth of the Terra ecosystem. LFG will use the proceeds of this $1 billion sale in forming the Bitcoin-denominated forex reserve of the UST stablecoins.
The LUNA Foundation Guard said that it has chosen the Bitcoin denominated Forex Reserve since it considers BTC to be “less correlated to the Terra ecosystem”. LFG shall be releasing more details regarding UST’s reserve function and design in the coming weeks.
Understanding How the Reserve Works
Terra’s native stablecoin UST is an algorithmic stablecoin that is popular within the DeFi ecosystems. The UST is the first algorithmic stablecoin with a $12 market cap and doesn’t use collateral to maintain its price. Terra explains the mechanism like:
“When the demand for Terra is high and the supply is limited, the price of Terra increases. When the demand for Terra is low and the supply is too large, the price of Terra decreases. The protocol ensures the supply and demand of Terra is always balanced, leading to a stable price.”
Users can mint the new Terra-based UST stablecoins by burning LUNA tokens. Similarly, they can burn UST to mint LUNA.
However, one of the issues with algorithmic stablecoins is their reflexive nature and the hypothetical risk of a “bank run” scenario. In its further explanation of choosing Bitcoin as a reserve asset, LFG said:
“Although the widespread adoption of UST as a consistently stable asset through market volatility should already refute this, a decentralized Reserve can provide an additional avenue to maintain the peg in contractionary cycles that reduces the reflexivity of the system.”