Hopefully by now, it’s pretty obvious that there’s a problem with $UST — a pretty big one.
However, investors are now wondering what it will take for the stablecoin to regain the upper hand. Unfortunately, the software might need some help from Terra’s trusty foundation, the Luna Foundation Guard (LFG).
Not too long ago, the Terra chain’s founder — Do Kwon — and the LFG had lofty ambitions to become the world’s second-largest holder of Bitcoin. They also implicitly suggested that using Bitcoin to collateralize $UST would follow. However, the LFG unfolded its long Bitcoin position today in an effort to find stable ground.
As part of that unfolding, the LFG announced today that it would loan out $750 million worth of Bitcoin to OTC firms, which will manage and trade the capital. And on the flipside, the LFG will take a 750 million UST loan to rebalance its reserves.
In total, Do Kwon and Terra’s guard are issuing roughly $1.5 billion in loans which are denominated in both Bitcoin and UST to help float them over this market-shaking speedbump.
The question is: will it work?
With UST looking prime to head below $0.70, 750 million UST might not be enough to paint over the exodus from the chain. In fact, with $UST’s market capitalization higher than $LUNA.X’s, things look bound to get uglier.
It’s too early to rule out whether or not the LFG will have to take more evasive actions. But, if you take a step back here, what we’re talking about right now is a massive, multi-billion dollar debasing of one of crypto’s largest stable assets. These implications aren’t just endemic to the Terra blockchain, which is one of the top 10 blockchains by market cap, but to the entirety of decentralized finance (DeFi) — mostly because $UST has become an extremely common pair across chains.
As Steven Goulden, a senior research analyst at Cumberland DRW, said in a Bloomberg report published about Do Kwon and the LFG’s effort: “We’re watching carefully to see how the market fares over the next 24 hours … including whether mechanisms … will be enough to hold in times of deep stress or if we need additional stabilization mechanisms.”