Golden Observation｜Terra UST decoupling? LFG Deploys $1.5 Billion Emergency Rescue

On May 9, according to data from CoinGecko, LUNA continued to fall, once falling below $60 to as low as $59.94, and is currently quoted at $61.75, a drop of 5.1% in the last 24 hours, a drop of nearly 50% from its historical high. UST once fell to $0.98, and is now quoted at $0.997, a drop of 0.3% in the last 24 hours.

As we all know, Terra adopts a dual-token design, and the working principle of UST is to maintain a balance between the two assets in the Terra ecosystem. This could affect the peg of the currency to the USD if there is not enough incentive in the market to profit from the arbitrage of UST and Luna. This also means that Terra cannot avoid the tragic large-scale liquidation events that are prone to occur when the encryption market encounters violent fluctuations.

According to data from Terra Analytics, the circulating supply of LUNA increased by 957,201 pieces in a single day on May 8, reaching 91.357 million pieces, setting a single-day increase in circulating supply of LUNA since April 8.

In addition, the withdrawal of 150 million UST liquidity on Curve on May 8 also attracted the attention of the market. Affected by a series of news, "UST decoupling" began to ferment in the market.

In response, Luna Foundation Guard (LFG) tweeted that in the past few days, the market for encrypted assets has been volatile. Uncertain macro conditions in legacy asset classes over the past week also reflect market volatility. Relative to Terra, $UST experienced significant directional flows over the weekend, accompanied by similar swings in $LUNA and $ BTC . While this flow has leveled off for now, it is prudent to prepare for potential future volatility. As mandated by LFG, LFG will actively defend the stability of the dollar-pegged $UST and the broader Terra economy, especially amid volatility in traditional markets and uncertain macro conditions.

Therefore, the LFG committee voted to implement the following measures: 1) Lend 750 million US dollars worth of BTC to the (Loan) OTC trading platform to ensure that UST is anchored to the US dollar. 2) As the market returns to normalization, 750 million UST will be loaned out to accumulate BTC. The transactions on both sides will be carried out at any time according to market fluctuations. As the market conditions gradually stabilize, the balance of BTC and UST in the LFG reserve pool will eventually be maintained. LFG stated that transfers from public LFG wallets will be reflected in the LFG reserve table soon.

LFG is a new decentralized organization developed to support the Luna ecosystem, and one of its biggest functions will be to establish a "foreign exchange reserve" to help the Luna ecosystem's companion stablecoin, UST, maintain its peg. LFG's funds come from Terra's donation and financing in the form of issuing LUNA. As of May 9, 2022, LFG has a total of nearly US$2.9 billion in assets, including 93% of BTC, 3.6% of LUNA and 3.4% of AVAX.

Terra founder Do Kwon responded that the LFG committee had just voted to deploy $1.5 billion in funds ($750 million in BTC, $750 million in UST) to ease market concerns about UST anchoring.

Do Kwon emphasized that, first of all, LFG is not trying to exit its Bitcoin position. The goal is to have this capital in the hands of professional market makers in order to: 1) buy UST if price < anchor 2) buy BTC if price >= anchor, thereby significantly increasing liquidity around UST. Although there is no obvious directionality in the buying and selling of UST right now, we think it is valuable to be ready to deploy funds in the current market. As the market recovers, we plan to take out loans to accumulate BTC, thereby increasing the size of our total reserves. We had hoped that when the Terra economy contracted, an on-chain Bitcoin reserve system would come online, eliminating the need for LFG to intervene in the norm at its discretion.

Do Kwon said this will be an important opportunity for Terra and the wider crypto community to gather empirical data on how LFG operates and fits into the Terra ecosystem. In the next few days, focus not on whether LFG chooses to deploy reserves, but on how.