Terra founder reveals what will happen to UST if Bitcoin price crashes

Terraform Labs CEO Do Kwon has conceded that a crash in the price of Bitcoin (BTC) would be “negative” for the stability of the TerraUSD (UST) stablecoin but that he expects Bitcoin to go up.

Terraform Labs is the entity behind the Terra blockchain platform, which plans on buying a total of $3 billion BTC as a reserve for UST.

Kwon made the comments in an interview on the Unchained podcast on Tuesday. Host Laura Shin asked Kwon what the short-term implications of holding so much BTC would be for the stability of UST.

Kwon said, “The worst case would be if we were buying Bitcoin and a crash happens six months later, and it’s correlated with a massive fall in demand for UST,” which would be, as he modestly put it, “negative.” However, that scenario isn‘t keeping him up at night:

“I’m sort of betting that the long-term scenario of Bitcoin going up, and the reserves being strong enough to withstand UST demand drops is the more likely scenario.”

Kwon has been buying Bitcoin to hold in Terra’s treasury as 40% of the collateral for UST. So far, Terra has acquired 30,727.9 BTC and most recently purchased 2,943 BTC on Tuesday. This makes Terra the third-largest single-wallet BTC holder.

Crypto YouTuber Danku_r argued to his 54,000 followers in a Wednesday tweet that the addition of BTC to Terra’s treasury would help mitigate the impact of a sudden retraction in UST demand. He said that Terra’s move would help avert a “death spiral due to market uncertainty” by helping the treasury “swallow the supply contraction of UST.”

One of Kwon’s stated goals for the treasury, known as the Luna Foundation Guard, is to make Terra “the largest single-wallet holder of BTC.” In order to dethrone the current leader, Michael Saylor’s MicroStrategy, Kwon will need to amass more than 125,051 BTC, according to Bitcoin wallet tracker Bitcoin Treasuries.

According to @stablekwon, @terra_money is a Layer 2 solution for BTC where “Bitcoin only needs to be good at being one thing, being an asset.” What do you think – will Terra be the layer 2 for bitcoin?

Episode link: https://t.co/T2nVfg7VyCpic.twitter.com/Thi9nVKUHv

— Laura Shin (@laurashin) March 31, 2022

Later in the interview, Kwon lived up to his reputation as an instigator by proclaiming that Terra is a layer-2 solution for the Bitcoin network. He argued that with Terra, Bitcoin has a bridge that allows it to be used “across a multitude of applications from DAOs to NFTs to DeFi.”

“And in terms of the expressivity, the transaction capabilities, the throughput, all those things can happen on Terra.”

Related: ‘Hold my beer’ — Terra already up $165M from buying Bitcoin as BTC stash nears Tesla’s

Bitcoin scaling solution Stacks (STX) founder Muneed Ali also took exception to Kwon's comments on Terra's relationship to Bitcoin. Whereas Stacks now currently benefits from the security of Bitcoin by settling transactions on that network, Ali told Cointelegraph in an Apr. 2 update that "Terra would need significant restructuring to become a Bitcoin L2," adding:

"It’s great that Do Kwon sees value in Bitcoin as the best money layer. Terra however is a separate blockchain and their current setup for purchasing and holding BTC is fairly manual."

Kwon’s comment drew the attention of the crypto community. In a tweet, Ethereum developer Antiprosynthesis responded by asking if all entities that use BTC to back a stablecoin should be considered layer-2 solutions. He said, “Even I don’t believe that Bitcoin’s standards have plummeted to such extent.”

A layer-2 solution helps a layer-1 blockchain to scale up its operations by moving many transactions to an alternate network to reduce congestion.

BTC is trading at $44,463, down 5.61% over the past 24 hours, according to Cointelegraph’s Price Index.