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To stabilize UST – Terra commits US$1.1 billion to LFG

 


Do Kwon, the founder and CEO of Terraform Labs, which is responsible for the development of the blockchain ecosystem Terra Luna ( LUNA ) and the associated stablecoin TerraUSD (UST), announced on Friday that Terraform Labs (TFL) has raised a total of 12 million USD LUNA or US$1.1 billion has donated to the Lunda Foundation Guard (LFG). The LFG was formed in January to drive the development of the Terra ecosystem and ensure the sustained effectiveness of its stablecoins. As Kwon explains, the donated LUNA will be burned to mine UST, which in turn will fill the LFG reserves:


“We will continue to add reserves until it is mathematically impossible for any idiots to make claims about UST decoupling.”

The UST is an algorithmic stablecoin that has a theoretical peg of 1:1 to the US dollar. To maintain this ratio, LUNA are exchanged for currency units of the stablecoin. So, if $1 of UST is burned, $1 of LUNA is simultaneously created and vice versa.


However, due to the high demand for UST in decentralized finance projects (DeFi) such as Curve Finance, there are imbalances in the exchange pools for stablecoins. For example: If many crypto investors want to exchange their stablecoins USD Coin ( USDC ) and Tether ( USDT ) for UST, then the reserves of the pool will inevitably shrink, which can lead to unwanted price fluctuations of the (value) stable coins, because the supply lags behind demand.


Two days earlier, TFL had therefore already decided to burn 4.2 million LUNA in order to strengthen the connection of the UST. To that end it was said:


“LFG will exchange (or burn) the relevant LUNA for UST and sell the new UST to the Curve Pool. The profits from this flow back to the LFG to use to purchase BTC.”

Thanks to the Terra-based Anchor Protocol, UST has quickly become one of the most popular stablecoins out there, promising a 20% APR on savings. However, since there is an imbalance between investors and borrowers, the Protocol's reserves are shrinking (because it has to pay out the accrued interest income. This is why the Anchor Protocol recently received massive financial injections from Terra.

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