LFG to Deploy $1.5 Billion to Strengthen UST's Dollar Peg and Build Bitcoin Reserve

This week, the Luna Foundation Guard (LFG) will deploy $1.5 billion worth of capital to “help protect” the Terra USD (UST) peg to the U.S. dollar amid a sharp pullback in bitcoin and the broader crypto market.

LFG, a Singapore-based nonprofit that is part of the Terra ecosystem, is tasked with providing collateral for the network’s algorithmic stablecoin, UST, to maintain the integrity of its dollar-peg while managing Terra’s reserves.

While the exact details are still unclear, LFG tweeted earlier today that it would initially lend $750 million worth of BTC to over-the-counter firms to manage and trade the funds.

Later, once the market stabilizes, LFG will take out a $750 million UST loan - likely from Terraform Labs - to rebalance its reserves.

LFG noted that the council voted to implement the plan after observing “significant” market volatility in BTC, UST, and Terra (LUNA) over the past few days.

Accordingly, the LFG Council has voted to implement the following actions:

- Lending $750M in Bitcoin to OTC firms to help secure UST's peg.

- Lending $750 million UST to accumulate BTC when market conditions normalize.

— LFG | Luna Foundation Guard (@LFG_org) May 9, 2022

Do Kwon, founder of Terraform Labs, further explained the move on Twitter, emphasizing that "LFG will not attempt to exit its Bitcoin position" and that ultimately deploying capital to strengthen UST in the short term will increase its Bitcoin position in the long term. Coin holdings:

“While buying and selling UST is not meaningfully directional right now, we believe there is value in the current market with capital ready to be deployed. As the market recovers, we plan to make loans denominated in BTC Redeem us and increase our total reserve size.”

The LFG Council just voted to deploy $1.5 billion in capital ($750 million in BTC, $750 million in UST) to ease market concerns about UST.

— Do Kwon (@stablekwon) May 9, 2022

With LFG’s $2.91 billion reserves largely backed by BTC, accounting for 91%, the drop in asset prices has forced the entity to realign its balance sheet to maintain the UST peg. At the time of writing, the price of Bitcoin is down 12.7% over the past seven days to around $33,600, while UST is trading just under $0.99.

Terra’s native asset, LUNA, has also suffered heavy losses over the past week, falling 24.5% to $62.15. LUNA also plays a role in maintaining the UST peg through its burning and minting mechanism.

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