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Bitcoin, the largest crypto by market capital, is, as of this writing, changing hands marginally above $47,000 – having jumped as high as $47,290 overnight. This charge to heights last visited in January follows news of Terra ecosystem planning a $10 billion Bitcoin purchase for its reserve.
Last week, Terra Labs chief Do Kwon said that Terra aimed to increase the size of its UST stablecoin reserve to $3 billion. The market reacted bullishly to the news, with many altcoins accompanying Bitcoin in its ascent.
This piece looks at Do Kwon’s ambitious plans and what they mean for Bitcoin and the general cryptocurrency sector.
Luna Foundation Guard targets a $3 billion BTC reserve for UST in the short term
The Luna Foundation Guard (LFG) has been making a series of moves towards bolstering the reserves backing its UST stablecoin. The LFG, formed in January to safeguard the larger Terra ecosystem, has been accruing billions worth of Bitcoin through raises and a private sale.
An address reportedly linked to the LFG has seen rising Bitcoin holdings, particularly over the last seven days. BitInfoCharts data shows, this address has logged deposits of approximately 27,785 BTC. At current value, this translates to $1.305 billion, and considering the price change metrics, the address has gained a massive $168.24 million in profits thus far.
Said reports align with the recent revelation by Terra founder Do Kwon, who divulged in a series of tweets that the LFG plans to balloon the backing of its algorithmic UST stablecoin to $3 billion worth of Bitcoin. The $3 billion is envisioned for the near future, but the goal is to construct a Bitcoin reserve worth $10 billion in the long term.
Kwon explained that for the shorter-term goal, the Foundation has already secured $1 billion via a private token sale, an over-the-counter sale led by Jump Crypto and Three Arrows Capital. He added that another $1.2 billion had been raised by selling UST against Tether, which means the LFG is now short of its target by $0.8 billion.
For the long-term $10 billion ambition, the Terraform Labs CEO explained that as the supply of UST money increases, a part of the revenue generated by issuing UST (seigniorage) would be leveraged to stack Bitcoin reserves.
Utility of the Bitcoin reserve
The argument behind strengthening the reserve backing the UST stablecoin is to ensure its peg to the dollar holds even tighter, remains 1:1. This backing would come in handy, especially in a volatile market, during which algorithmic stablecoins have often been criticized for their uncollateralized nature.
Allowing UST holders to flip between Bitcoin and UST would give consumers confidence in holding an asset backed by a token with an underlying value and minimal correlation.
Alongside Do Kwon’s revelation, Jump Crypto has published a community proposal regarding the Bitcoin reserve pool. The proposal aims to establish mechanisms of how to use the reserve to retain UST’s peg.
Jump crypto’s plan would see the BTC reserve support UST during possible ‘black swan events’ and get replenished when they are over, and the market is stable. While the tokenomic structure resembles the current one between LUNA and UST, the architecture will likely change. Also, netting flow would be substituted by exit & entry liquidity.
A vision foreseen by Hal Finney
Do Kwon’s massive Bitcoin buy for the UST stablecoin project is almost a fulfilment of a forecast by renowned late computer scientist Harold Finney.
In December 2010, a dozen months after the creation of Bitcoin, the American computer scientist shared a post on the Bitcoin Talk forum – as if predicting – that the Satoshi-creation could morph into a form of money that acts as a reserve currency.
“[Bitcoin’s fate is] to be the ‘high-powered money’ that serves as a reserve currency for banks that issue their own digital cash,” an extract of the post reads.
Finney envisioned the king cryptocurrency serving as a reserve currency for banks. While that isn’t the exact case at present, Do Kwon’s move is still a corroboration of Finney’s projection of Bitcoin being a ‘reserve’ asset.
CoinDesk’s research analyst George Kaloudis in his recent piece, reviewed the potential impact of the $10 billion BTC reserve, suggesting that it is an ‘appealing’ venture to crypto enthusiasts.
“UST could become a dollar stablecoin backed by a completely auditable, transparent and decentralized digital asset,” he wrote. “You won’t need to trust Do Kwon that the collateral is there […]. You’ll be able to see for yourself on the blockchain.”
To learn more about Terra visit our Investing in Terra guide.
Sam is a financial content specialist with a keen interest in the blockchain space. He has worked with several firms and media outlets in the Finance and Cybersecurity fields.