Following a discouraging display on Monday and Tuesday, the crypto market has shown a bit of recovery action. Most tokens suffered heavy losses – up to double digits – at the peak of the slump early yesterday, but they have since recouped.
Contrary to the general trend, Terra’s LUNA remained largely unaffected, only suffering brief dips when the downtrend intensified. Even more conspicuous, the token is leading the altcoin pack in the fresh bounce back. LUNA/USD is up by nearly 15% in the last 24 hours.
Outside the market, the Terra ecosystem on Tuesday revealed it had completed a $1 billion private token sale to set up a decentralized Bitcoin reserve for TerraUSD. More on this and LUNA price action below:
Terra reveals the long-awaited [REDACTED] 3
In what easily qualifies as one of the most significant sales in the crypto scene yet, Luna Foundation Guard (LFG) announced yesterday that it had concluded a $1 billion over-the-counter sale of Terra’s LUNA native token.
The private token sale was completed with the participation of some of crypto’s largest venture capital firms, including Three Arrows Capital, Jump Crypto, Defiance Capital, and Republic Capital. Further, the announcement revealed that the purchased tokens would be vested for a four-year period.
Terra explained that the funds collected are denominated in Bitcoin and will act as a forex reserve for Terra’s UST stablecoin to maintain a 1:1 peg with the US dollar. In the words of Terra’s founder Do Kwon, a decentralized economy needs decentralized money that also needs a decentralized reserve (Bitcoin in this instance).
The team noted that there has been growing adoption of a stable UST, albeit there remains concerns over a “hypothetical risk” of a bank run that could destabilize price levels of the network’s native tokens.
Terra is banking on the Bitcoin decentralized reserve to eliminate this risk and alleviate any concerns. This reserve will strengthen support to retain the peg even in “contractionary cycles that reduce the reflexivity of the system.”
A Bitcoin reserve to protect against a black swan event
UST is Terra’s algorithmic stablecoin, meaning its peg to the US dollar is stabilized by arbitrage. Since the token is decentralized, its backing is not centrally controlled, unlike competitors such as Tether’s USDT and Circle’s USDC. UST is simply pegged by the controlling dynamics of supply and demand.
The protocol’s mechanism incentivizes users to burn UST and mint LUNA whenever UST’s price falls below $1 (demand for UST is low, and the supply is high). When the demand for UST is high, and supply is low, LUNA is burnt, and UST is minted to regulate the price back to $1.
However, this balance could fall into disarray in case of a black swan (severe-consequence unexpected) event in the market, hence the need for a Bitcoin reserve. In such an instance where the market is unable to restore UST’s peg due to long-drawn-out market selloffs, the reserve would help ensure Terra’s arbitrage mechanism remains functional to stabilize the price.
The choice of Bitcoin is rather obvious as the Foundation needed a decentralized asset that is hardly correlated to the Terra ecosystem. While at the moment, only the world’s leading digital asset has been added to the reserve, the LFG has plans to include other assets showing uncorrelated movements relative to Terra.
Terra said it would provide more details in the coming week on the design and function of the reserve currency.
The Luna Foundation Guard was only unveiled last month as a non-profit organization based in Singapore and focused on advancing the growth of the Terra ecosystem. Part of the Foundation’s goals is to ensure the stability of Terra’s algorithmic stablecoins.
Terra functions as a decentralized protocol that issues a number of algorithmically-controlled stablecoins, of which UST is the most dominant with a $12.285 billion market capitalization as per CoinMarketCap.
Terra (LUNA) market performance
LUNA is currently (09:00 UTC) enjoying the biggest gains among the top ten cryptocurrencies by market capital. Propelled by a 14.61% upswing in the last 24 hours, the token has crossed the $56 mark for the first time since last Thursday.
LUNA/USD 7-day trading chart. Source: CoinMarketCap
LUNA is, as of writing, trading at $57.26 against the dollar. The latest ascent has pushed LUNA/USD to its level a week ago, further evidenced by a slight negative 0.51% change over the last seven days.
24-hr and 7-day changes among top ten cryptocurrencies. Source: CoinMarketCap
Worth noting, the majority of crypto-assets are trading more than 12% below their mark a week ago.
Buyers will be keen to attempt breaching the $60 level on the back of the current upward momentum. The last time the token traded above this mark was a fortnight ago. If unsuccessful, LUNA will seek immediate support at $52.50 or lower at $48.60.
To learn more about this token visit our Investing in Terra guide.
The post Luna Foundation Guard Establishes a Bitcoin Reserve for Its UST Stablecoin, LUNA Is Leading In 24-hr Gains appeared first on Securities.io.
